<PAGE>
FILED PURSUANT TO RULE 424(a)
REGISTRATION NUMBER: 333-25409
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 29, 1997
[LOGO OF ARIS(SM)]
- --------------------------------------------------------------------------------
2,020,800 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
Of the 2,020,800 shares of Common Stock, without par value ("Common Stock"),
of ARIS Corporation ("ARIS" or the "Company") offered hereby (the
"Offering"), 2,000,000 shares are being offered by the Company and 20,800
shares are being offered by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the
sale of shares by the Selling Shareholders.
Prior to this Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $13.00 and $15.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering
price. The Company has applied to have the Common Stock approved for listing
on the Nasdaq National Market under the symbol "ARSC."
For information concerning certain risk factors which should be considered by
prospective investors, see "risk factors" commencing on page 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
<TABLE>
<CAPTION>
PROCEEDS PROCEEDS
PRICE UNDERWRITING TO TO SELLING
TO PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this Offering of approximately $700,000
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an additional 300,000 shares of Common Stock to cover over-
allotments. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ , and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel and certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer
and to reject orders in whole or in part. Delivery of the shares of Common
Stock offered hereby to the Underwriters is expected to be made in New York,
New York on or about , 1997.
DEUTSCHE MORGAN GRENFELL
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
The date of this Prospectus is , 1997.
<PAGE>
[ARIS Logo]
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.
[A graphic consisting of three concentric circles laid on top of one another.
The center circle lists three companies: Oracle, Microsoft and Sun
Microsystems. The second circle outlines ARIS' three operating divisions and
the outer circle outlines, by operating division, the general products and
services offered by each division.]
Except as otherwise noted, all information in this Prospectus, including
share and per share information, assumes no exercise of the Underwriters'
over-allotment option and gives effect to a two-for-one stock split of the
Company's outstanding Common Stock effected August 29, 1996.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
ARIS provides an integrated information technology ("IT") solution consisting
of consulting and training services primarily focused on Oracle Corporation
("Oracle") and Microsoft Corporation ("Microsoft") technologies. ARIS currently
focuses on three core consulting competencies: packaged application
implementation, custom application development and systems architecture
planning and deployment. The Company currently offers 118 instructor-led course
titles for IT professionals conducted at ARIS' training centers and at client
facilities. The Company also 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. The Company's strategy is to
become a leading provider of integrated IT solutions by: (i) leveraging
synergies between consulting and training; (ii) focusing on leading-edge
technologies; (iii) attracting and retaining highly skilled employees;
(iv) maintaining high levels of client satisfaction; (v) expanding its
geographic presence; and (vi) pursuing strategic acquisitions.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.... 2,020,800 shares (including 2,000,000 shares by the
Company and 20,800 shares by the Selling Shareholders)
Common Stock outstanding 9,423,900 shares(1)
after this Offering....
Use of Proceeds......... To repay debt and for working capital and general
corporate purposes.
Proposed Nasdaq National ARSC
Market Symbol..........
</TABLE>
SUMMARY CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED
--------------------------------------------------------------- -----------------------
MARCH 31, MARCH 31,
1992 1993 PRO FORMA 1996 1997
(UNAUDITED) (UNAUDITED) 1994 1995(2) 1996(3) 1996(4) (UNAUDITED) (UNAUDITED)
----------- ----------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Consulting revenue...... $2,091 $3,416 $6,132 $ 9,725 $16,312 $18,245 $2,543 $ 6,633
Training revenue........ 112 263 551 4,821 9,385 17,423 1,778 3,243
Software revenue........ -- 7 369 205 1,201 2,022 106 533
------ ------ ------ ------- ------- ------- ------ -------
Total revenue........... 2,203 3,686 7,052 14,751 26,898 37,690 4,427 10,409
Cost of consulting and
training.............. 1,214 2,086 3,637 7,176 13,353 17,558 2,177 4,901
Cost of software....... -- -- 47 42 93 527 4 48
------ ------ ------ ------- ------- ------- ------ -------
Gross profit........... 989 1,600 3,368 7,533 13,452 19,605 2,246 5,460
Selling, general and
administrative
expense............... 403 947 2,077 4,552 10,206 15,890 1,445 3,751
------ ------ ------ ------- ------- ------- ------ -------
Income from operations.. 586 653 1,291 2,981 3,246 3,715 801 1,709
====== ====== ====== ======= ======= ======= ====== =======
Net income.............. $ 397 $ 448 $ 826 $ 2,010 $ 2,014 $ 2,208 $ 506 $ 1,044
====== ====== ====== ======= ======= ======= ====== =======
Net income per share(5). $ 0.10 $ 0.10 $ 0.12 $ 0.24 $ 0.23 $ 0.26 $ 0.06 $ 0.12
====== ====== ====== ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED(6)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments in marketable
securities............................................. $ 1,857 $23,197
Total assets............................................ 19,822 41,162
Total debt.............................................. 5,887 1,887
Shareholders' equity.................................... 6,615 31,955
</TABLE>
- -------
1 Excludes 1,203,025 shares of Common Stock issuable upon exercise of options
outstanding at May 26, 1997 under the Company's 1995 Stock Option Plan (the
"1995 Stock Option Plan") and the Company's 1997 Stock Option Plan (the "1997
Stock Option Plan") at a weighted average exercise price of $5.28 per share
and 4,000 shares of Common Stock issuable upon exercise of a warrant at an
exercise price of $10.00 per share. See "Management--Executive Compensation,"
"--Stock Option Plans," and Note 10 of Notes to Consolidated Financial
Statements.
2 Reflects the acquisition of Clarity, Inc. on January 1, 1995 in a transaction
accounted for as a purchase.
3 Reflects the acquisition of SQLSoft, Inc., SofTeach Corporation and Noetix
Corporation on May 1, 1996, October 1, 1996 and October 1, 1996,
respectively, in transactions accounted for as purchases.
4 Presents the consolidated results of operations of the Company as if SQLSoft,
Inc., SofTeach Corporation, Noetix Corporation and Oxford Computer Group
Limited had been acquired on January 1, 1996, including the impact of certain
adjustments. The Company completed the acquisition of Oxford Computer Group
Limited on February 28, 1997 in a transaction accounted for as a purchase.
5 See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in the per share
calculation.
6 Gives effect to the application of the estimated net proceeds of this
Offering to the Company. See "Use of Proceeds."
1
<PAGE>
THE COMPANY
ARIS provides an integrated IT solution consisting of consulting and
training services primarily focused on Oracle and Microsoft technologies. The
Company also 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. The Company's strategy is to become a leading
provider of integrated IT solutions by: (i) leveraging synergies between
consulting and training; (ii) focusing on leading-edge technologies; (iii)
attracting and retaining highly skilled employees; (iv) maintaining high
levels of client satisfaction; (v) expanding its geographic presence; and (vi)
pursuing strategic acquisitions. ARIS may shift or expand its vendor focus
over time in order to maintain alignment with leading-edge, emerging
technologies.
ARIS CONSULTING. ARIS provides mission critical IT consulting services to
clients that require assistance planning, designing, developing, testing and
deploying Oracle and Microsoft technologies. ARIS currently focuses on three
core consulting competencies: packaged application implementation, custom
application development and systems architecture planning and deployment. ARIS
believes that its vendor focus, consulting methodologies and proprietary
software tools result in higher value-added services for its consulting
clients. As of March 31, 1997, ARIS employed 142 consultants and project
managers.
ARIS TRAINING. ARIS is a leading provider of training for IT professionals
in Microsoft BackOffice, Oracle, Sun Solaris and Java, Internet/intranet and
networking technologies. ARIS provides instructor-led training through
regularly scheduled open-enrollment classes, private classes (using both
standard and customized course content) and on-line training. During 1996,
ARIS offered 95 course titles and its instructors taught 989 classes. As of
March 31, 1997, the Company had 44 classrooms in nine training centers with a
total capacity of 479 students.
The Company has experienced significant growth, with revenue and operating
income increasing from $7.1 million and $1.3 million, respectively, in 1994,
to $26.9 million and $3.2 million, respectively, in 1996. Since 1995, the
Company has acquired three training companies, one software development
company, assumed the operations of one IT consulting business, and opened four
new offices. In addition, in February 1997, the Company acquired Oxford
Computer Group Limited ("Oxford"), an IT training and consulting company
located in the United Kingdom that specializes in Microsoft technologies. Pro
forma combined revenue and operating income for 1996, was $37.7 million and
$3.7 million, respectively, assuming the two training companies and one
software company acquired in 1996 and the acquisition of Oxford in 1997, had
been completed on January 1, 1996.
The Company currently operates eight consulting offices and nine training
centers in the United States and the United Kingdom. The Company's clients
include Fortune 1000 companies and governmental entities such as Boeing,
Microsoft, Hewlett-Packard, Lockheed Martin, Starbucks Coffee, TIG Holdings,
Quebecor, the British Broadcasting Company, National Westminster Group,
Tektronix, Nike, Weyerhaeuser and the U.S. Internal Revenue Service.
ARIS was incorporated in Washington in October 1990. The Company's
headquarters is located at 6720 Fort Dent Way, Suite 250, Seattle, Washington
98188-2555 and its telephone number at that address is (206) 433-2081.
2
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, investors
should carefully consider the following risk factors before making an
investment decision concerning the Common Stock. All statements, trend
analysis and other information contained in this Prospectus relative to
markets for the Company's services and products and trends in revenue, gross
margin and anticipated expense levels, as well as other statements including
words such as "seek," "anticipate," "believe," "plan," "estimate," "expect,"
"intend" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks,
and the Company's actual results of operations may differ materially from
those contained in the forward-looking statements.
RECRUITMENT AND RETENTION OF IT PROFESSIONALS. The Company's future success
will depend in large part on its ability to attract, develop, motivate and
retain highly skilled 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.
See "Business--Personnel and Human Resources."
ABILITY TO MANAGE GROWTH AND INTEGRATE RECENT ACQUISITIONS. ARIS recently
has experienced rapid growth that has placed, and will continue to place,
significant demands on its management and other resources. Between January 1,
1996 and May 26, 1997, the Company's total employee headcount increased from
115 to 388, and the Company opened or acquired four new consulting offices and
six new training centers in the United States and the United Kingdom. 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. None of
the Company's senior management previously has managed a business of the
Company's size or has any 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.
In January 1995 the Company acquired an IT training company and, between May
1996 and October 1996, the Company acquired two IT training companies, one
software development company and assumed the operations of one IT consulting
business. In February 1997, the Company completed the acquisition of Oxford,
an IT training and consulting company located in the United Kingdom. Oxford is
the largest company acquired by ARIS to date and its first international
acquisition. There can be no assurance that the Company will be able to
integrate Oxford successfully into the ARIS organization. The failure to
integrate Oxford or any of the Company's other recent 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
3
<PAGE>
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. One client, Tektronix, accounted for 9.1%, 21.8% and 20.0%
of the Company's total revenue in 1996, 1995 and 1994, respectively. 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. From March 1993 to
March 1997, the Company qualified under Section 8(a) of the Small Business Act
(the "8(a) Program"). As an 8(a) Program participant, the Company was awarded
contracts with U.S. government agencies totaling approximately 9.0%, 13.7% and
3.7% of the Company's revenue in 1996, 1995 and 1994, respectively. In the
first quarter of 1997, the Company ceased to be eligible to participate in the
8(a) Program. Accordingly, the Company may be less successful bidding for
certain U.S. government contracts in areas where 8(a) Program qualification is
considered in the contract award process. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Clients."
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, and Sun Microsystems, Inc. ("Sun"). During
1996, management estimates that approximately 84.8% of the Company's
consulting revenue was derived from projects in which ARIS implemented IT
solutions employing Oracle technologies. During the same period, management
estimates that training in Microsoft and Oracle technologies generated
approximately 66.6% and 14.6%, respectively, of the Company's revenue from
training services. The Company participates in a number of Microsoft, Oracle
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.
Management believes that Oracle may develop an authorized third-party training
program. If Oracle creates an authorized third-party training program and ARIS
does not participate in the program, ARIS' training revenue and ability to
compete effectively in providing training in Oracle technologies could be
adversely impacted. 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 vendor
actions which might adversely affect the Company's ability to compete
successfully. See "Business--Relationships with Key Vendors."
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
4
<PAGE>
particular quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
PROJECT RISKS. Most of ARIS' 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
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, ARIS 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. ARIS intends to continue growing through
strategic acquisitions of businesses that the Company believes will complement
its operations. The success of ARIS' 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 ARIS 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 Y. Song, its founder, President, Chief Executive Officer and Chairman.
The loss of the 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. The Company currently maintains and is the beneficiary of a
"key man" life insurance policy in the amount of $2.0 million on the life of
5
<PAGE>
Mr. Song. See "Management--Directors, Executive Officers and Key Employees"
and "--Employment Agreements."
INTERNATIONAL OPERATIONS. As a result of the recent acquisition of Oxford, a
substantial portion of the Company's revenue is derived from its international
operations. Revenue from international operations for the first quarter of
1997, which was the first period in which the Company had material revenues
from international operations, was $821,000 representing 7.9% of total revenue
for the quarter. 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 of 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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.
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
Business Machines and Hewlett-Packard, software vendors, other Microsoft
Authorized Technical Education Centers ("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 ARIS 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. See "Business--
Competition."
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 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.
6
<PAGE>
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 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, methodologies and courseware 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, methodologies, courseware,
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. See "Business--Intellectual Property."
CONTROL BY PRINCIPAL SHAREHOLDERS. Paul Y. Song, the Company's founder,
President, Chief Executive Officer and Chairman, is the Company's single
largest shareholder. Mr. Song's wife, Tina J. Song, is the Director of 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. Upon the completion of
this Offering, Mr. and Mrs. Song will beneficially own approximately 47.4% of
the Company's outstanding shares of Common Stock. As a result, Mr. and Mrs.
Song will 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 (the "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
Eastern Operations, own an aggregate of 220,000 shares of Common Stock and
options to purchase an additional 60,800 shares of Common Stock. See
"Management" and "Principal and Selling Shareholders."
7
<PAGE>
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 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, including coverage for errors
and omissions, against claims of up to $2.0 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.
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to this
Offering there has been no public market for the Company's Common Stock. There
can be no assurance that an active public market for the Common Stock will
develop or be sustained after the Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined by negotiation between the
Company and the representatives of the Underwriters. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Moreover, 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. In addition, 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 is not uncommon against
issuers, 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 the 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 preferences and other rights
thereof without any further vote or action by the Company's
8
<PAGE>
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. See "Description of Capital Stock--
Preferred Stock," "Description of Capital Stock--Washington Anti-Takeover
Statute" and "Description of Capital Stock--Certain Provisions in Restated
Articles and Restated Bylaws."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market after this Offering could adversely
affect prevailing market prices for the Common Stock. Taking into account
restrictions imposed by the Securities Act of 1933, as amended (the "Securities
Act"), rules promulgated by the Securities and Exchange Commission (the
"Commission") thereunder and lock-up agreements between certain shareholders
and Deutsche Morgan Grenfell Inc. (the "Lock-up Agreements"), the number of
additional shares that will be available for sale in the public market, subject
in some cases to the volume and other restrictions of Rule 144 under the
Securities Act, will be as follows: 6,548,160 shares of Common Stock will be
eligible for sale beginning 180 days after the closing of this Offering, and
807,020 shares will be eligible for sale pursuant to Rule 144 upon the
expiration of applicable holding periods, which will expire between November 1,
1997 and March 10, 1999. Deutsche Morgan Grenfell Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such Lock-up Agreements. Upon the closing of this Offering,
holders of 301,200 shares of Common Stock are entitled to certain rights with
respect to the registration of such shares under the Securities Act. In
addition, the Company intends to file a registration statement on Form S-8
under the Securities Act approximately 180 days after the closing of this
Offering to register approximately 1,978,000 shares of Common Stock reserved
for issuance under the Company's stock option plans. In addition, up to 4,000
shares of Common Stock issuable upon exercise of an outstanding warrant will
become available for sale in the public market following the expiration of the
Rule 144 holding period on February 24, 1998, if exercised pursuant to cashless
exercise provisions, or one year following the exercise of the warrant for
cash. See "Description of Capital Stock--Registration Rights" and "Shares
Eligible for Future Sale."
DISCRETION AS TO THE USE OF PROCEEDS. The Company has not yet identified
specific uses for a significant portion of the net proceeds from this Offering.
The Company's management will retain broad discretion to allocate net proceeds.
Purchasers of the shares of Common Stock offered hereby will be entrusting
their funds to the Company's management, upon whose judgment they must depend,
with limited information concerning the specific working capital requirements
and general corporate purposes to which the funds ultimately will be applied.
See "Use of Proceeds."
DILUTION; ABSENCE OF DIVIDENDS. The initial public offering price will be
substantially higher than the net tangible book value per share of Common
Stock. Investors participating in this Offering will therefore incur immediate,
substantial dilution of $11.12 per share. To the extent outstanding options or
warrants to purchase the Company's Common Stock are exercised, there will be
further dilution. See "Dilution." The Company has not paid any cash dividends
since 1993 and does not anticipate declaring or paying any cash dividends in
the foreseeable future. See "Dividend Policy."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS. This Offering will benefit
all current shareholders of the Company, including its directors and executive
officers and the Selling Shareholders, by, among other things, creating a
public market for the Company's Common Stock, thereby increasing liquidity and
potentially increasing the market value of such shareholders' investment in the
Company. Assuming an initial public offering price of $14.00
9
<PAGE>
per share, after deducting underwriting discounts and commissions, the
aggregate realized gain to the Selling Shareholders as a result of this
Offering will be approximately $167,000. Following the Offering the current
shareholders of the Company will own shares having an aggregate unrealized
gain of approximately $106.7 million. See "Dilution" and "Principal and
Selling Shareholders."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock offered by the Company are estimated to be $25,340,000 ($29,246,000 if
the over-allotment option is exercised in full), assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and other offering expenses payable by the Company. The Company will
not receive any of the proceeds from the sale of the shares of Common Stock
offered by the Selling Shareholders.
The Company intends to use approximately $4.0 million of the net proceeds
from this Offering to repay a term loan from U.S. Bank of Washington, N.A.
("U.S. Bank"), which the Company incurred primarily to fund its repurchase of
415,000 shares of the Company's Common Stock from certain shareholders at
$8.50 and $9.75 per share in February and March of 1997. See "Certain
Transactions." The term loan bears interest at a variable rate, currently
8.25%, and is due and payable within ten days of the closing of this Offering.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." The Company intends to use
the remaining net proceeds for working capital, expansion of the Company's
business and for general corporate purposes. A portion of the net proceeds
also may be used to acquire or invest in complementary businesses. Although
the Company frequently evaluates potential acquisitions of complementary
businesses, there are no present understandings, commitments or agreements
with respect to the acquisition of any other businesses. See "Business--
Strategy."
To the extent that the net proceeds of this Offering are not used
immediately, they will be invested in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
The Company has not paid any cash dividends since 1993. The Company
currently expects to retain all future earnings to finance the operation and
expansion of its business and does not anticipate declaring or paying any cash
dividends in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997, (i) on an actual basis; and (ii) as adjusted to reflect the sale of
2,000,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $14.00 per share and the application of the
estimated net proceeds therefrom. The information set forth below should be
read in conjunction with the audited consolidated financial statements of the
Company and Notes thereto (the "Consolidated Financial Statements") and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
-------------------
<S> <C> <C>
Notes payable.......................................... $ 1,887 $ 1,887
Term loan.............................................. 4,000 --
------- -------
5,887 1,887
------- -------
Shareholders' equity:
Common Stock, no par value; 100,000,000 shares
authorized; 7,423,900; and 9,423,900 shares issued
and outstanding, respectively(1)..................... 3,224 28,564
Retained earnings..................................... 3,180 3,180
Net unrealized holding gain on investments............ 209 209
Cumulative foreign currency translation adjustment.... 2 2
------- -------
Total shareholders' equity......................... 6,615 31,955
------- -------
Total capitalization................................. $12,502 $33,842
======= =======
</TABLE>
- --------
(1) Excludes 1,203,025 shares of Common Stock issuable upon exercise of
options outstanding at May 26, 1997 under the 1995 Stock Option Plan and
the 1997 Stock Option Plan at a weighted average exercise price of $5.28
per share and 4,000 shares of Common Stock issuable upon exercise of a
warrant at an exercise price of $10.00 per share. See "Management--
Executive Compensation," "--Stock Option Plans," and Note 10 of Notes to
Consolidated Financial Statements.
11
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997 was
$1,787,000, or $0.24 per share of Common Stock. After giving effect to the
sale by the Company of 2,000,000 shares offered hereby (at the assumed initial
public offering price of $14.00 per share and after deducting the estimated
underwriting discount and offering expenses), the adjusted net tangible book
value of the Company as of March 31, 1997 would have been approximately
27,127,000, or $2.88 per share. This represents an immediate increase in such
net tangible book value of $2.64 per share to existing shareholders and an
immediate dilution of $11.12 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $14.00
Net tangible book value per share before the Offering....... $0.24
Increase per share attributable to new investors............ $2.64
Net tangible book value per share after the Offering.......... $ 2.88
------
Net tangible book value dilution per share to new investors... $11.12
======
</TABLE>
The following table summarizes the difference between the total
consideration and average price per share paid by the existing shareholders
and that paid by new investors purchasing shares in this Offering at the
assumed initial public offering price of $14.00.
<TABLE>
<CAPTION>
AVERAGE
SHARES TOTAL CONSIDERATION PRICE
----------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 5,393,000 72.9% $ 79,000 0.3% $ 0.02
New investors..................... 2,000,000 27.1 28,000,000 99.7 $14.00
--------- ----- ----------- -----
Total........................... 7,393,000 100.0% $28,079,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table excludes 1,203,025 shares of Common Stock issuable upon
exercise of options outstanding at May 26, 1997 under the 1995 Stock Option
Plan and the 1997 Stock Option Plan at a weighted average exercise price of
$5.28 per share and 4,000 shares of Common Stock issuable upon exercise of a
warrant at an exercise price of $10.00 per share. See "Management--Executive
Compensation," "--Stock Option Plans," and Note 10 of Notes to Consolidated
Financial Statements.
12
<PAGE>
SELECTED CONSOLIDATED AND PRO FORMA
COMBINED FINANCIAL DATA
The consolidated statement of operations data for the three year period
ended December 31, 1996 and the consolidated balance sheet data as of December
31, 1995 and 1996 are derived from the Consolidated Financial Statements of
the Company that have been audited by Price Waterhouse LLP, independent
accountants, which are included elsewhere in this Prospectus. The balance
sheet data as of December 31, 1994 are derived from financial statements of
the Company which are not included in this Prospectus but which were audited
by Price Waterhouse LLP. The statement of operations data for the two year
period ended December 31, 1993 and the quarters ended March 31, 1996 and March
31, 1997 and the balance sheet data as of December 31, 1992 and 1993 and March
31, 1997 are derived from unaudited financial statements of the Company which,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of
the results of operations for these periods. The pro forma combined statement
of operations data for the year ended December 31, 1996 has been derived from
the unaudited pro forma combined statement of income of the Company, which
presents the results of operations of the Company as if SQLSoft Inc.
("SQLSoft"), SofTeach Corporation ("SofTeach"), Noetix Corporation ("Noetix")
and Oxford had been acquired on January 1, 1996, (the "Pro Forma Combined
Financial Information"), which are included elsewhere in this Prospectus. The
following selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, the Consolidated
Financial Statements, the Pro Forma Combined Financial Information and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The historical results
should not be construed to be indicative of future results of operations and
the pro forma information should not be construed to be indicative of actual
or future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED
-------------------------------------------------------- -----------------------
MARCH 31, MARCH 31,
1992 1993 PRO FORMA 1996 1997
(UNAUDITED) (UNAUDITED) 1994 1995(1) 1996(2) 1996(3) (UNAUDITED) (UNAUDITED)
----------- ----------- ------ ------- ------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Consulting............. $2,091 $3,416 $6,132 $ 9,725 $16,312 $18,245 $2,543 $ 6,633
Training............... 112 263 551 4,821 9,385 17,423 1,778 3,243
Software............... -- 7 369 205 1,201 2,022 106 533
------ ------ ------ ------- ------- ------- ------ -------
Total revenue.......... 2,203 3,686 7,052 14,751 26,898 37,690 4,427 10,409
------ ------ ------ ------- ------- ------- ------ -------
Cost of sales:
Consulting and
training.............. 1,214 2,086 3,637 7,176 13,353 17,558 2,177 4,901
Software............... -- -- 47 42 93 527 4 48
------ ------ ------ ------- ------- ------- ------ -------
Total cost of sales.... 1,214 2,086 3,684 7,218 13,446 18,085 2,181 4,949
------ ------ ------ ------- ------- ------- ------ -------
Gross profit........... 989 1,600 3,368 7,533 13,452 19,605 2,246 5,460
Operating expenses:
Selling, general and
administrative........ 403 947 2,077 4,552 10,206 15,890 1,445 3,751
------ ------ ------ ------- ------- ------- ------ -------
Income from operations.. 586 653 1,291 2,981 3,246 3,715 801 1,709
Other income (expense),
net................... 16 35 11 115 115 64 2 (42)
------ ------ ------ ------- ------- ------- ------ -------
Income before income
tax.................... 602 688 1,302 3,096 3,361 3,779 803 1,667
Income tax expense..... 205 240 476 1,086 1,347 1,571 297 623
------ ------ ------ ------- ------- ------- ------ -------
Net income.............. $ 397 $ 448 $ 826 $ 2,010 $ 2,014 $ 2,208 $ 506 $ 1,044
====== ====== ====== ======= ======= ======= ====== =======
Net income per share(4). $ 0.10 $ 0.10 $ 0.12 $ 0.24 $ 0.23 $ 0.26 $ 0.06 $ 0.12
====== ====== ====== ======= ======= ======= ====== =======
Weighted average number
of common and common
equivalent shares
outstanding(5)......... 3,813 4,286 6,676 8,487 8,582 8,582 8,574 8,513
====== ====== ====== ======= ======= ======= ====== =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1992 1993 1997
(UNAUDITED) (UNAUDITED) 1994 1995(1) 1996(2) (UNAUDITED)
----------- ----------- ------ ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and investments in
marketable securities.. $ 174 $ 78 $ 274 $2,491 $ 1,573 $ 1,857
Total assets............ 1,060 1,607 3,320 6,843 12,956 19,822
Total debt.............. -- -- -- -- 1,500 5,887
Shareholders' equity.... 757 1,203 2,113 4,642 8,210 6,615
</TABLE>
- --------
(1) The Company acquired Clarity on January 1, 1995 in a transaction accounted
for as a purchase.
(2) The Company acquired SQLSoft, SofTeach and Noetix on May 1, 1996, October
1, 1996 and October 1, 1996, respectively, in transactions accounted for
as purchases.
(3) Presents the consolidated results of operations of the Company as if
SQLSoft, SofTeach, Noetix and Oxford had been acquired on January 1, 1996,
including the impact of certain adjustments. The Company completed the
acquisition of Oxford on February 28, 1997 in a transaction accounted for
as a purchase.
(4) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
the per share calculation.
(5) Excludes 1,203,025 shares of Common Stock issuable upon exercise of
options outstanding at May 26, 1997 under the 1995 Stock Option Plan and
the 1997 Stock Option Plan at a weighted average exercise price of $5.28
per share and 4,000 shares of Common Stock issuable upon exercise of a
warrant at an exercise price of $10.00 per share. See "Management--
Executive Compensation," "--Stock Option Plans," and Note 10 of Notes to
Consolidated Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ARIS began operations in 1990 as an IT consulting company specializing in
custom software application development for Oracle technologies. In 1993, ARIS
expanded its consulting activities from custom application development to
include packaged application implementation and introduced its first software
product, ARIS DFRAG. In response to client requests for training, the Company
began providing training services in Oracle technologies in 1991, and became a
Microsoft ATEC in 1994. In 1996 the Company became a Sun Educational Services
U.S. Strategic Partner for Seattle, Washington and Portland, Oregon.
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.
Software revenue is derived from the sale of ARIS' products, 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 the
Company 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 8(a) Program.
As an 8(a) Program participant, the Company was awarded contracts with U.S.
government agencies totaling 9.0%, 13.7% and 3.7% of the Company's revenue in
1996, 1995 and 1994, respectively. In the first quarter of 1997, the Company
ceased to be eligible to participate in the 8(a) Program. Accordingly, the
Company may be less successful bidding for certain U.S. government contracts
in areas where 8(a) Program qualification is considered in the contract award
process.
RECENT ACQUISITIONS
In addition to its internal growth, the Company has grown through strategic
acquisitions of complementary businesses. Since January 1995, the Company has
made the following acquisitions:
15
<PAGE>
CLARITY, INC. In January 1995, the Company acquired the stock of Clarity, an
IT training company based in Bellevue, Washington, for $117,000 in cash and
1.4 million shares of ARIS Common Stock having a value of $263,000. Clarity
had revenue of $2.3 million in 1994.
SQLSOFT, INC. In May 1996, the Company acquired the stock of SQLSoft, a
Microsoft ATEC based in Bellevue, Washington for 707,900 shares of ARIS Common
Stock having a value of $1.3 million. SQLSoft had revenue of $2.6 million in
1995.
SOFTEACH CORPORATION. In October 1996, the Company purchased assets and
assumed liabilities of SofTeach, a Microsoft ATEC located in Denver, Colorado,
for a cash payment of $750,000, a $500,000 promissory note and 42,000 shares
of ARIS Common Stock having a value of $152,000. The Company combined the
operations of SofTeach with its existing operations in Denver. SofTeach had
revenue of $1.5 million for the first nine months of 1996 and $2.1 million in
1995.
NOETIX CORPORATION. The Company acquired the stock of Noetix in October 1996
in exchange for a cash payment of $835,000 and 40,000 shares of ARIS Common
Stock having a value of $145,000. Noetix develops, distributes and supports a
software product, NoetixViews, which enhances an end-user's ability to access
and manage information from Oracle's database products. Noetix had revenue of
$821,000 for the first nine months of 1996 and $413,000 in 1995.
OXFORD COMPUTER GROUP LIMITED. In February 1997, the Company acquired the
stock of Oxford in exchange for 280,000 shares of ARIS Common Stock having a
value of $1.4 million. Oxford is a Microsoft ATEC with facilities in Oxford,
London and Birmingham in the United Kingdom which also provides IT consulting
services primarily on Microsoft technologies. In calendar year 1996, Oxford
had revenue of (Pounds)4.7 million.
Each of these transactions was accounted for as a purchase. Capitalized
software development costs, non-compete agreements and goodwill resulting from
these acquisitions have been amortized over approximately three years, two
years and fifteen years, respectively.
In August 1996 the Company assumed the operations of Cray Solutions, a
division of Cray Research, Inc., a subsidiary of Silicon Graphics, Inc. In
connection with this transaction, the Company added 14 consultants and two
administrative staff providing IT consulting services in Dallas, Texas.
16
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total consolidated revenue (except as noted):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, QUARTER ENDED
------------------- -----------------------
MARCH 31, MARCH 31,
1996 1997
1994 1995 1996 (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA: ----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Consulting...................... 87.0% 65.9% 60.6% 57.4% 63.7%
Training........................ 7.8 32.7 34.9 40.2 31.2
Software........................ 5.2 1.4 4.5 2.4 5.1
----- ----- ----- ----- -----
Total revenue................. 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of sales:
Consulting and training......... 51.5 48.6 49.7 49.2 47.1
Software........................ 0.7 0.3 0.3 0.1 0.5
----- ----- ----- ----- -----
Total cost of sales........... 52.2 48.9 50.0 49.3 47.6
----- ----- ----- ----- -----
Gross margin.................. 47.8 51.1 50.0 50.7 52.4
Operating expenses:
Selling, general and
administrative................. 29.5 30.9 37.9 32.6 36.0
----- ----- ----- ----- -----
Income from operations............ 18.3 20.2 12.1 18.1 16.4
Other income (expense).......... 0.2 0.8 0.4 0.0 (0.4)
----- ----- ----- ----- -----
Income before income tax.......... 18.5 21.0 12.5 18.1 16.0
Income tax expense.............. 6.7 7.4 5.0 6.7 6.0
----- ----- ----- ----- -----
Net income........................ 11.8% 13.6% 7.5% 11.4% 10.0%
===== ===== ===== ===== =====
- --------
Cost of sales:
Consulting and training(1)...... 54.4% 49.3% 52.0% 50.4% 49.6%
Software(2)..................... 12.7% 20.5% 7.7% 3.8% 9.0%
</TABLE>
- --------
(1) Expressed as a percentage of combined consulting and training revenue.
(2) Expressed as a percentage of software revenue.
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Revenue in the first quarter of 1997 ("Q1 1997") was $10.4 million,
representing a 135.1% increase over revenue of $4.4 million in the first
quarter of 1996 ("Q1 1996"), a result of increased revenue in each of the
Company's business lines.
Consulting revenue in Q1 1997 was $6.6 million, representing a 160.8%
increase over consulting revenue of $2.5 million in Q1 1996. This increase is
primarily attributable to an increase in the number of billable consultants
and project managers from 58 at the end of Q1 1996 to 142 at the end of Q1
1997, and an 11.8% increase in average billing rates. The Company opened new
offices in the Washington, D.C. area in January 1996, Dallas, Texas in August
1996 and Tampa, Florida in September 1996 and acquired Oxford on February 28,
1997, which together contributed $2.1 million in consulting revenue in Q1
1997.
Training revenue was $3.2 million in Q1 1997, representing an 82.4% increase
over training revenue of $1.8 million in Q1 1996. This increase is
attributable to the acquisition of SQLSoft in May 1996, SofTeach in October
1996 and Oxford on February 28, 1997 and an increase in the number of classes
held from 183 in Q1 1996 to 286 in Q1 1997. The Company's training revenue
increased $639,000 in Q1 1997 as a result of new offices opened.
17
<PAGE>
Software revenue in Q1 1997 was $533,000 as compared with software revenue
of $106,000 in Q1 1996. This increase is principally the result of the
acquisition of Noetix in October 1996, which added approximately $388,000 in
revenue in Q1 1997.
Cost of consulting and training consists primarily of salaries and employee
benefits for consultants, project managers and instructors, subcontractor
fees, and non-reimbursable travel expenses related to consulting and training
activities. Cost of consulting and training was $4.9 million in Q1 1997,
representing a 125.1% increase over $2.2 million in Q1 1996. This increase is
primarily attributable to an increase in the number of consultants, project
managers and instructors from 74 at the end of Q1 1996 to 209 at the end of Q1
1997.
Cost of software consists of amortization of capitalized software costs
related to completed products acquired in the acquisition of Noetix in October
1996, software development costs expensed prior to determination of market
feasibility and costs and manufacturing expenses associated with the
production and packaging of software products. Cost of software increased to
$48,000 in Q1 1997 from $4,000 in Q1 1996.
Selling, general and administrative expense ("SG&A expense") consists of
salaries and employee benefits for executive, managerial, administrative and
sales personnel, facility leases, amortization of capitalized computer
hardware and equipment costs, software license fees and travel and business
development costs. SG&A expense was $3.8 million in Q1 1997, representing a
159.6% increase over $1.4 million in Q1 1996. This increase is attributable
primarily to the growth in the number of management, sales and administrative
staff from 55 at the end of Q1 1996 to 158 at the end of Q1 1997. SG&A expense
as a percentage of total revenue increased from 32.6% in Q1 1996 to 36.0% in
Q1 1997. This increase reflects the inclusion of Oxford in the Company's
results of operations for the month of March. Oxford generally experiences
higher SG&A expenses as a percentage of revenue than does the Company's U.S.
operations.
Other income (expense) consists primarily of interest expense associated
with short term borrowings and interest income on cash and cash equivalents.
In Q1 1997 the Company had $54,000 in interest expense related primarily to a
term loan with U.S. Bank entered into in connection with the repurchase of
shares of Common Stock from certain shareholders of the Company. See "--
Liquidity and Capital Resources."
1996 COMPARED TO 1995
Revenue in 1996 was $26.9 million, representing an 82.3% 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 35.0% of revenue as compared to 52.9% of
revenue in 1995. See "Risk Factors--Customer Concentration" and "Business--
Clients."
Consulting revenue in 1996 was $16.3 million, representing a 67.7% 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, an increase in the number and size of
consulting projects and, to a lesser extent, the geographic expansion of the
Company's consulting services from the Seattle, Washington and Portland,
Oregon areas to include metropolitan Washington, D.C., Tampa, Florida, Dallas,
Texas and Denver, Colorado.
18
<PAGE>
Training revenue in 1996 was $9.4 million, representing a 94.7% increase
over training revenue of $4.8 million in 1995. This increase is attributable
to a number of factors, including (i) the acquisition of SQLSoft in May 1996
and SofTeach in October 1996, which management estimates added approximately
$1.8 million and $378,000 in training revenue in 1996, respectively; (ii) high
demand for certain new course offerings, including training in Microsoft
Windows NT 3.51 and Microsoft Internet and messaging products; (iii) the
Company's designation as a Sun Educational Services U.S. Strategic Partner for
the Seattle, Washington and Portland, Oregon areas; and (iv) 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 revenue of
$205,000 in 1995. This increase is principally the result of an increase in
the sales of ARIS DFRAG following the hiring of a senior sales manager for
software products in late 1995 and the release of ARIS DFRAG 4.0 in January
1996. In addition, the acquisition of Noetix in October 1996 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
86.1% increase over $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 were not billing
immediately upon being hired. The lower utilization was partially offset by a
10% increase in average billing rates. In addition, the Company had higher
than usual subcontractor costs in the second half of 1996 primarily as a
result of the assumption of the operations of Cray which used a higher
percentage of subcontractors than the Company. Extensive use of subcontractors
will generally adversely impact the Company's gross margins. As a result, the
Company seeks to keep its use of subcontractors to a minimum.
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 revenue and is
primarily attributable to the costs of packaging and distribution of ARIS
DFRAG 4.0 and NoetixViews.
SG&A expense was $10.2 million in 1996, representing a 124.2% increase over
SG&A expense of $4.6 million in 1995. SG&A expense as a percentage of total
revenue increased from 30.9% in 1995 to 37.9% in 1996. This increase is due to
non-recurring expenses associated with the acquisition and integration of
SQLSoft, Noetix and SofTeach, higher expenses due to the opening of four new
offices in Dallas, Texas, London, England, Tampa, Florida and the metropolitan
Washington, D.C. area, including expenses related to the hiring of personnel
required to staff the new 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
expense related to the acquisition of Noetix and amortization of intangible
assets of $116,000 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.
19
<PAGE>
1995 COMPARED TO 1994
The Company's revenue was $14.8 million in 1995, representing a 109.2%
increase over revenue of $7.1 million in 1994. The Company's single largest
client accounted for 21.8% and 20.0% of revenue in 1995 and 1994,
respectively. The Company's five largest clients in 1995 accounted for 52.9%
of revenue as compared to 38.2% of revenue in 1994. See "Risk Factors--
Customer Concentration" and "Business--Clients."
Consulting revenue was $9.7 million in 1995, representing a 58.6% increase
over revenue of $6.1 million in 1994. This increase reflects an increase in
the number and size of consulting projects and an increase in the average
number of billable consultants and project managers over the period.
Training revenue was $4.8 million in 1995, compared with $551,000 in 1994.
This increase reflects the impact of additional revenue resulting from the
acquisition of Clarity, high demand for new course offerings in Microsoft and
Oracle technologies, the expansion of existing training facilities in the
Seattle, Washington area and the opening of a new training center in the
Portland, Oregon area. In addition, the Company began offering classes to the
public in 1995 and held 194 public classes in that year.
The Company's software revenue was $205,000 in 1995, compared with $369,000
in 1994. In 1994, the Company's software revenue included a one-time payment
of $125,000 made by OpenVision Technology to acquire rights to resell ARIS
DFRAG. The remaining decrease was the result of declining sales of ARIS DFRAG
3.0 prior to the release of ARIS DFRAG 4.0 in January 1996.
Cost of consulting and training was $7.2 million in 1995, representing a
97.3% increase from $3.6 million in 1994, but declined as a percentage of
combined consulting and training revenue from 54.4% in 1994 to 49.3% in 1995.
The decrease in cost of consulting and training as a percentage of combined
consulting and training revenue is primarily attributable to increased
utilization of consultants and project managers, an increase in the average
billing rate and the addition of $4.3 million in training revenue that had
slightly lower costs.
Cost of software was $42,000 in 1995 as compared with $47,000 in 1994. This
decrease is attributable to the decline in sales of ARIS DFRAG 3.0 in 1995
prior to the release of ARIS DFRAG 4.0 in January 1996.
SG&A expense was $4.6 million in 1995, representing a 119.2% increase from
$2.1 million in 1994. SG&A expense increased as a percentage of total revenue
from 29.5% in 1994 to 30.9% in 1995. The increase is primarily due to
generally higher expenses required to expand ARIS' training activities,
including increased facility and equipment expenses, an increase in marketing
expenses, and an increase in the number of sales, management and
administrative personnel. Full-time sales, management and administrative
personnel increased from 14 at the end 1994 to 46 at the end of 1995. In
addition, the Company incurred approximately $125,000 in non-recurring charges
related to the acquisition and subsequent integration of Clarity in 1995.
In 1995, the Company had other income of $115,000 as compared with other
income of $11,000 in 1994. The increase in 1995 is attributable primarily to
interest income, investment income realized on an equity fund investment and
income realized from the sale of fixed assets.
The Company's effective income tax rate was 35.1% in 1995 and 36.6% in 1994.
This decrease is primarily the result of a one time tax rebate in Oregon in
1995.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
statements of operations for each of the nine quarters in the period ended
March 31, 1997 and the percentage of the Company's total revenue represented
by each item in the respective quarter. In the opinion of management, this
information has been presented on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with the Consolidated Financial Statements of
the Company and related Notes thereto. The operating results for any quarter
should not be considered indicative of results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Consulting............. $2,544 $2,535 $2,221 $2,425 $2,543 $3,497 $4,532 $5,740 $ 6,633
Training............... 818 1,168 1,372 1,463 1,778 2,601 2,217 2,789 3,243
Software............... 59 50 42 54 106 176 386 533 533
------ ------ ------ ------ ------ ------ ------ ------ -------
Total revenue.......... 3,421 3,753 3,635 3,942 4,427 6,274 7,135 9,062 10,409
------ ------ ------ ------ ------ ------ ------ ------ -------
Cost of sales:
Consulting and
training.............. 1,626 1,773 1,825 1,952 2,177 3,001 3,681 4,494 4,901
Software............... 6 3 15 18 4 13 21 55 48
------ ------ ------ ------ ------ ------ ------ ------ -------
Total cost of sales.... 1,632 1,776 1,840 1,970 2,181 3,014 3,702 4,549 4,949
------ ------ ------ ------ ------ ------ ------ ------ -------
Gross profit........... 1,789 1,977 1,795 1,972 2,246 3,260 3,433 4,513 5,460
Operating expenses:
Selling, general and
administrative........ 933 971 1,265 1,383 1,445 2,064 2,462 4,235 3,751
------ ------ ------ ------ ------ ------ ------ ------ -------
Income from operations.. 856 1,006 530 589 801 1,196 971 278 1,709
Other income (expense),
net................... 2 25 26 62 2 44 21 48 (42)
------ ------ ------ ------ ------ ------ ------ ------ -------
Income before income
tax.................... 858 1,031 556 651 803 1,240 992 326 1,667
Income tax expense..... 296 356 190 244 297 451 362 237 623
------ ------ ------ ------ ------ ------ ------ ------ -------
Net income.............. $ 562 $ 675 $ 366 $ 407 $ 506 $ 789 $ 630 $ 89 $ 1,044
====== ====== ====== ====== ====== ====== ====== ====== =======
Net income per share.... $ 0.06 $ 0.08 $ 0.04 $ 0.05 $ 0.06 $ 0.09 $ 0.07 $ 0.01 $ 0.12
====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Consulting............. 74.4% 67.5% 61.1% 61.5% 57.4% 55.7% 63.5% 63.3% 63.7 %
Training............... 23.9 31.1 37.7 37.1 40.2 41.5 31.1 30.8 31.2
Software............... 1.7 1.4 1.2 1.4 2.4 2.8 5.4 5.9 5.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of sales:
Consulting and
training.............. 47.5 47.2 50.2 49.5 49.2 47.8 51.6 49.6 47.1
Software............... 0.2 0.1 0.4 0.5 0.1 0.2 0.3 0.6 0.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Total cost of sales.... 47.7 47.3 50.6 50.0 49.3 48.0 51.9 50.2 47.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit........... 52.3 52.7 49.4 50.0 50.7 52.0 48.1 49.8 52.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative........ 27.3 25.9 34.8 35.1 32.6 32.9 34.5 46.7 36.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations.. 25.0 26.8 14.6 14.9 18.1 19.1 13.6 3.1 16.4
Other income (expense),
net................... 0.1 0.7 0.7 1.6 -- 0.7 0.3 0.5 (0.4)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
tax.................... 25.1 27.5 15.3 16.5 18.1 19.8 13.9 3.6 16.0
Income tax expense..... 8.7 9.5 5.2 6.2 6.7 7.2 5.1 2.6 6.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 16.4% 18.0% 10.1% 10.3% 11.4% 12.6% 8.8% 1.0% 10.0 %
===== ===== ===== ===== ===== ===== ===== ===== =====
- --------
Cost of sales:
Consulting and
training(1)............ 48.3% 47.9% 50.8% 50.2% 50.4% 49.2% 54.5% 52.7% 49.6 %
Software(2)............. 10.2% 6.0% 35.7% 33.3 3.8% 7.4% 5.4% 10.3% 9.0 %
</TABLE>
- --------
(1) Expressed as a percentage of combined consulting and training revenue.
(2) Expressed as a percentage of software revenue.
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 of each year, 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.
During 1995, consulting revenue decreased slightly in each of the second and
third quarters primarily due to reorganization of the consulting business from
a highly-centralized model to a decentralized regional model, the loss of
several consultants to competitors and clients and decreased levels of
employee utilization due to the integration of newly hired consultants and
seasonality. In the second half of 1995, the Company assigned a manager to
each region to focus on employee satisfaction and retention and hired a
dedicated recruiting staff. During 1996 and the first quarter of 1997
consulting revenue increased sequentially each quarter.
Except for the third quarter of 1996, training revenue generally increased
in each of the nine quarters presented, although growth in training revenue
was generally slower in the third and fourth quarters of each year due to
seasonality. For the third quarter of 1996, training revenue decreased by
14.8% due to the centralized scheduling of classes, which resulted in an
inaccurate assessment of regional demand for specific course titles, and the
integration of SQLSoft and the acquisition of SofTeach, each of which diverted
significant management resources. The Company believes it has addressed these
issues by decentralizing class scheduling and implementing an acquisition
strategy that dedicates specific ARIS personnel, not responsible for other
operational tasks, to the integration of an acquired entity.
Cost of consulting and training has increased in each of the nine quarters
presented due to steady hiring of consultants, project managers and
instructors to support an increased number of consulting projects and training
classes. Unanticipated variations in the number and timing
22
<PAGE>
of consulting projects, fill rates for training classes, average utilization
rates and average billing rates of consultants have resulted in quarterly
fluctuations in gross margins. Cost of consulting and training as a percentage
of combined consulting and training revenue is generally higher in the third
and fourth quarter of each year due to the seasonality of the Company's
business. During the summer months vacation schedules of client personnel
affect the demand for training classes. In addition, the Company conducts a
six-to-eight week training course for newly hired IT professionals each
summer, which, coupled with vacation schedules of consultants, results in
lower than average utilization rates for the Company's consultants. In the
fourth quarter, training revenue is adversely impacted by the Company's
inability to conduct four- and five-day classes during the shortened work
weeks in that quarter due to national holidays.
SG&A expense increased in absolute dollars in each of the nine quarters
presented as the Company incurred significant non-recurring expense associated
with the opening of three new training facilities, the acquisition of four
companies and the hiring of management, sales and marketing and administrative
staff to support this growth. During 1996, ARIS' accounting staff increased
from three to seven, its sales staff increased from three to nine and its IT
staff increased from three to seven. Also during the nine quarters presented,
the Company developed and implemented a regional management infrastructure.
SG&A expense as a percentage of total revenue fluctuated over the nine
quarters presented. This quarterly variation in margin is primarily the result
of the timing of expenses incurred in opening new training facilities and the
acquisition and integration of five companies. In the first quarter of 1995,
SG&A expense as a percentage of total revenue was 27.3% primarily due to non-
recurring expenses related to the acquisition of Clarity in January 1995. In
the third and fourth quarters of 1995, SG&A expense was 34.8% and 35.1%,
respectively, as a result of costs associated with the implementation of a
regional management infrastructure, the expansion of training facilities in
the Seattle, Washington area and in Denver, Colorado and increased marketing
expenses. SG&A expense as a percentage of total revenue was relatively
constant at 32.6% and 32.9% in each of the first and second quarters of 1996,
respectively; increasing to 34.5% in the third quarter of 1996 as a result of
the expenses associated with the opening of a new office near London, England,
the acquisition of SQLSoft, further expansion of the Company's training
facilities and headquarters in the Seattle, Washington and Portland, Oregon
areas, the costs associated with the assumption of the operations of Cray, and
the establishment of a subsidiary for the development and marketing of ARIS'
software products. In the fourth quarter of 1996, SG&A expense as a percentage
of total revenue increased to 46.7% as a result of the aggregate impact of the
ongoing integration costs related to the SQLSoft acquisition, the assumption
of the operations of Cray, the acquisition and subsequent integration costs of
SofTeach and Noetix, the opening of a new training center in the Washington
D.C. area, the expenses associated with the opening of a new consulting office
in Tampa, Florida, and the hiring and training of management and
administrative personnel to support the regionalized management infrastructure
implemented for training operations during this quarter.
Due to the foregoing factors, among others, it is possible that in some
future quarter the Company's results of operations may vary from the
expectations of the securities analysts or investors. In such event, the price
of the Company's Common Stock would likely be materially affected. See "Risk
Factors--Variability of Quarterly Operating Results."
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through 1995, the Company financed its business activities primarily through
cash generated from operations. Net cash provided from operations was 541,000
for the quarter ended March 31, 1997, $706,000 in 1996, $2.2 million in 1995
and $477,000 in 1994. At March 31, 1997, the Company held cash and cash
equivalents of $485,000 and investments in marketable securities of $1.4
million.
In 1996, 1995 and 1994, the Company invested a significant portion of its
net income in an equity fund; amounts invested were $462,000, $381,000 and
$368,000, respectively. On April 14, 1997, this fund was liquidated and the
net proceeds of $1.35 million were used to repay a portion of the $1.9 million
outstanding under the Company's revolving credit facility with U.S. Bank. In
the future, the Company intends to invest its surplus cash in short-term,
interest-bearing, investment-grade securities.
Accounts receivable increased from $2.7 million at December 31, 1995 to $5.2
million at December 31, 1996 to $8.6 million at March 31, 1997. The average
collection cycle for accounts receivable remained relatively constant for each
of the periods presented.
During the period from December 31, 1995 to March 31, 1997, intangible and
other assets increased from $81,000 to $3.4 million primarily as a result of
the acquisitions completed during the period. Amortization expense of
approximately $425,000 will be recorded during 1997 related to these
intangibles.
At December 31, 1996, the Company had $1.0 million outstanding on a line of
credit with U.S. Bank. In March 1997, the Company replaced this existing line
of credit with a new line of credit with U.S. Bank, which provides for
borrowings of up to $8.0 million (the "U.S. Bank Facility"). Under the U.S.
Bank Facility, which expires on June 1, 1998, the Company may borrow up to
$8.0 million on a revolving basis, of which $5.0 million may be converted to a
term loan. Borrowings under the U.S. Bank Facility bear interest at a variable
rate based on certain financial ratios and range from the London Inter-bank
Offered Rate (LIBOR) plus 1.75% to LIBOR plus 3.0%. The effective interest
rate for borrowings under the U.S. Bank Facility was 9.375% as of May 26,
1997. The U.S. Bank Facility includes covenants relating to the maintenance of
certain financial ratios, such as minimum net worth, and provides that all
borrowings are collateralized by the Company's assets. The Company is in
compliance with all covenants contained in the U.S. Bank Facility except for
one covenant regarding maintenance of the ratio of current assets to current
liabilities. U.S. Bank has waived the Company's noncompliance with this ratio
until the earlier of the closing of this Offering or July 15, 1997.
Additionally, the U.S. Bank Facility prohibits Oxford from incurring
indebtedness in excess of $600,000 from any non-U.S. bank. As of March 31,
1997, $1.9 million was outstanding under the revolving portion of the U.S.
Bank Facility and $4.0 million was outstanding under the fixed-term portion of
the U.S. Bank Facility. The Company is required to repay the term loan from
the proceeds of this Offering within ten days of the closing of this Offering.
The term loan was incurred primarily to fund the Company's repurchase of
415,000 shares of Common Stock from certain shareholders at $8.50 and $9.75
per share in February and March of 1997. See "Certain Transactions."
In connection with the acquisition of the assets of SofTeach, the Company
issued to SofTeach a promissory note in the principal amount of $500,000 which
bears interest at 6%, and is payable in two installments of $250,000 each,
plus accrued interest. The Company paid $250,000 on this note on April 2, 1997
and the balance is due on July 1, 1997.
24
<PAGE>
The Company invested $1.2 million, $911,000 and $220,000 in facilities and
equipment, including computer hardware, in 1996, 1995 and 1994, respectively.
Additionally, the Company invested $475,000 in facilities and equipment during
Q1 1997. During Q1 1997 and fiscal 1996, the Company expended $93,000 and
$1.4 million, respectively, for the acquisition of the training and software
businesses it acquired during those periods. The Company estimates capital
expenditures during fiscal 1997 of approximately $2.0 million to expand the
Company's training centers in the Portland, Oregon and Washington, D.C. areas,
to hire up to an additional 70 employees and to purchase computers and
equipment to support the Company's anticipated expansion.
The Company believes that the expected net proceeds from this Offering,
combined with cash provided from its operations and borrowings available under
the U.S. Bank Facility, will be sufficient to meet the Company's working
capital and capital expenditure requirements for the next 18 months or longer.
The Company does not believe that its international operations currently
subject it to material currency fluctuation risks. Revenue from the operations
of Oxford are denominated primarily in British pounds. The Company's revenue
from its other international operations are denominated in U.S. dollars. The
Company does not plan to repatriate earnings from Oxford to the United States
nor make significant advances to Oxford. As the Company's international
operations expand, and to the extent that its inter-company funding policies
change, management intends to continue to evaluate the impact of potential
fluctuations in foreign exchange rates on the Company's results of operations
and liquidity. Should management determine that foreign exchange rate
fluctuations are likely to impact materially the Company's results of
operations or liquidity, the Company may enter into forward exchange contracts
or engage in other hedging activities in order to mitigate such risks.
In February 1997, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128) which
requires disclosure of basic earnings per share and diluted earnings per share
and is effective for periods ended subsequent to December 15, 1997. The effect
of adoption of SFAS 128 would be as follows:
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED DECEMBER 31, ENDED
----------------------------- MARCH 31,
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
As reported:
Net income per share.................. $ 0.12 $ 0.24 $ 0.23 $ 0.12
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding. 6,675,570 8,487,011 8,581,572 8,512,537
========= ========= ========= =========
Pro forma:
Basic net income per share............ $ 0.14 $ 0.24 $ 0.24 $ 0.12
========= ========= ========= =========
Weighted average number of common
shares outstanding................... 5,887,335 8,464,767 8,480,334 8,401,066
========= ========= ========= =========
Diluted net income per share.......... $ 0.12 $ 0.24 $ 0.23 $ 0.12
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding. 6,675,570 8,487,011 8,581,572 8,512,537
========= ========= ========= =========
</TABLE>
The difference between as reported and pro forma basic earnings per share
would have been more significant if stock options granted at prices below the
proposed initial public offering price and issued during the twelve-month
period immediately preceding this Offering included in accordance with Staff
Accounting Bulletin Number 83 had not been included.
25
<PAGE>
BUSINESS
ARIS provides an integrated IT solution consisting of consulting and
training services primarily focused on Oracle and Microsoft technologies. ARIS
currently focuses on three core consulting competencies: packaged application
implementation, custom application development and systems architecture
planning and deployment. The Company currently offers 118 instructor-led
course titles for IT professionals conducted at ARIS' training centers and at
client facilities. The Company also 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. For example, enterprises are increasingly moving
from mainframe systems that run proprietary software to open systems based on
client/server architectures and Internet-enabled technologies. International
Data Corporation ("IDC") estimates that the 1995 worldwide market for IT
consulting was $19.8 billion and is projected to grow to $38.2 billion by the
year 2000.
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.
To maximize the effectiveness of increasingly complex information systems,
enterprises must ensure that their IT employees possess the skills to operate,
maintain and maximize performance of these systems. Each time an enterprise
implements a new technology or updates its existing technology, employee
training is required and, in many large enterprises, IT training is virtually
continuous. IDC estimates that the 1995 worldwide market for IT education and
training was $14.9 billion and is projected to grow to $27.0 billion by 2000.
In 1995, the training of IT professionals represented $3.3 billion of the $6.1
billion IT education and training market in the United States. 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 its clients with an integrated IT solution consisting of
consulting and training services that enables them to quickly leverage new
technologies to deliver and improve operational processes and performance. The
ARIS solution includes the following characteristics:
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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 and Microsoft. Expertise in leading-edge technologies allows 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
primarily provides public and private instructor-led training to IT
professionals on leading-edge technologies including Microsoft Windows NT, SQL
Server, Exchange Server, and Visual Basic; Oracle database administration and
development tools such as Designer/2000 and Developer/2000; Sun Java and
Solaris; Microsoft Internet and Intranet technologies; and general networking
technologies. The Company uses vendor-supplied and proprietary courseware and
training methodologies. The Company is a Microsoft ATEC and an independent
provider of Oracle training. The Company also is a Sun Educational Services
U.S. Strategic Partner for Seattle, Washington and Portland, Oregon.
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 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 and Microsoft.
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
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<PAGE>
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 opening training centers in markets
where it currently has consulting offices. ARIS also intends to expand
internationally to better service its multinational clients and to gain access
to new markets.
PURSUE STRATEGIC ACQUISITIONS. Since January 1995, ARIS has pursued an
aggressive acquisition strategy acquiring five complementary businesses. 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 mission critical IT consulting services primarily to clients
that require assistance planning, designing, developing, testing and deploying
Oracle and Microsoft 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. As of March 31, 1997, ARIS employed 142 consultants
and project managers in eight offices. The Company's consulting clients are
generally medium to large businesses and governmental agencies. See Note 13 of
Notes to Consolidated Financial Statements for certain financial information
relating to the Company's consulting business.
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. As of March 31, 1997, ARIS was engaged in 36 of
these projects, which typically require five to 15 consultants, and generally
extend for a period of six months to two years. The following is a case study:
In 1994, Tektronix, Inc., a leading manufacturer of electronic
hardware, engaged ARIS to regionalize and standardize the financial and
distribution operations of Tektronix' diverse independent business
divisions around the world, which had been using nearly 500 separate
computer information systems. The Company's relationship with Tektronix
began with an engagement to implement Oracle General Ledger, Accounts
Payable, and Project Accounting applications at Tektronix' corporate
headquarters. At the same time, Tektronix was in the process of
replacing its legacy order management/accounts receivable applications.
Because of ARIS' demonstrated abilities and knowledge of Oracle
Financials, Tektronix engaged ARIS to assist with the Order Management
project. ARIS has been involved in the implementation of General
Ledger, Financial Reporting, Purchasing, Accounts Payable, Project
Accounting, Fixed
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<PAGE>
Assets, Order Entry, Inventory and Accounts Receivable. ARIS
consultants and project managers are currently working with Tektronix
on the implementation of world-wide Oracle Applications including
Accounts Receivable, Order Entry and Inventory at Tektronix locations
in 30 countries.
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. As of March 31, 1997, ARIS was
engaged in 39 of these projects, which typically require three to 10
consultants, and generally extend for a period of four months to one year. The
following is a case study:
As part of its efforts to enforce federal excise tax provisions
relating to the sale of diesel fuel, the U.S. Internal Revenue Service
("IRS") engaged ARIS in a $3.0 million contract to develop a customized
software system that would permit IRS field agents wireless remote
access to Oracle databases. ARIS designed and implemented a system that
allows IRS agents to review the compliance and enforcement histories of
diesel fuel users using a laptop or handheld computer. This system has
largely eliminated the need for IRS agents to carry certain files into
the field and to send reports and correspondence to IRS facilities
through the mail. Following the successful completion of this project,
the IRS engaged ARIS to perform additional consulting work and to
provide training services to IRS information specialists.
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. As of March 31, 1997, ARIS was engaged in 19 of
these projects, which typically require one to five consultants, and generally
extend for a period of one to six months. The following is a case study:
The Washington State Department of Social and Health Services
("DSHS") retained ARIS to design an Internet protocol ("IP") addressing
scheme and Microsoft Windows NT domain strategy that would be
appropriate for a distributed environment with limited administrative
support for DSHS' 32 locations and over 3,000 computers throughout
Washington. The IP addressing plan had to co-exist with a number of IP
based machines already on the network that were not part of the DSHS
upgrade. ARIS consultants faced significant constraints with regard to
the number of network addresses available and the number of sub-
networks already deployed at the various sites. ARIS consultants
successfully designed and deployed a distributed architecture
throughout DSHS on a timely basis.
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
29
<PAGE>
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 PRODUCTS. The Company currently has two software products,
ARIS DFRAG and NoetixViews. In 1993, the Company developed ARIS DFRAG, a tool
used by database administrators to identify and reorganize "fragmented" data
in Oracle databases, thereby improving performance. In January 1996, the
Company released ARIS DFRAG 4.0, which includes a graphical user interface
based upon Microsoft Windows which can be used to browse and manage database
objects within an Oracle database. ARIS consulting uses ARIS DFRAG in many of
its consulting projects. As of March 31, 1997, ARIS had sold 395 ARIS DFRAG
licenses to 87 clients in 13 countries.
The Company acquired Noetix in October 1996. NoetixViews allows end users to
view data from Oracle Applications, including General Ledger, Accounts
Payable, Accounts Receivable, Inventory, Purchase Order, Order Entry, Fixed
Assets, Bill of Material, Work in-Process, Project Costing and Project
Billing. The Company also has developed an interface to NoetixViews that is
available for Oracle's new version of its Discoverer/2000, an end user
decision support product suite. As of March 31, 1997, ARIS had sold 550
NoetixViews module licenses to 110 clients in five countries.
Management believes ARIS' software products enhance its consulting services.
Through its consulting and training services, ARIS expects to continue to
identify development opportunities for new software products. See Note 13 of
Notes to Consolidated Financial Statements for certain financial information
relating to the Company's software business.
ARIS TRAINING
ARIS is a leading provider of training to IT professionals in Microsoft
BackOffice, Oracle Applications, Sun Solaris and Java, 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, "train the
trainer" programs, curriculum development and training consulting. The Company
offers public open enrollment classes in nine training centers located in the
metropolitan areas of Seattle, Washington, Portland, Oregon, Washington, D.C.,
and Denver, Colorado, as well as London, Birmingham and Oxford in the United
Kingdom. The Company also delivers private training both at its training
centers and at client facilities worldwide. See Note 13 of Notes to
Consolidated Financial Statements for certain financial information relating
to the Company's training business.
As of March 31, 1997, the Company employed 72 instructors, of whom 60 were
certified by Microsoft, Sun or both. Each of the Company's instructors has, on
average, more than 10 years of professional IT experience. During 1996, ARIS
offered 95 course titles and its instructors conducted 989 classes. At March
31, 1997, the Company had 44 classrooms with a capacity of 479 students. The
average duration of a class during 1996 was 3.8 days. 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 and Sun
authorized training designations.
ARIS is a Microsoft ATEC and an independent provider of Oracle training. The
Company is a Sun Educational Services U.S. Strategic Partner for Seattle,
Washington and Portland, Oregon. Oxford also is a Microsoft ATEC and has
received ISO 9001 certification.
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<PAGE>
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.
The following are ARIS' 118 current course titles:
ORACLE TECHNOLOGY
- --------------------------------------------------------------------------------
ORACLE GENERAL ORACLE DBA
Oracle Queries Using the SQL Oracle7 Database Architecture and
Language Administration
Oracle7 Foundation Oracle7 Advanced Database
Administration Workshop
Developing Oracle7 Stored Procedures ORACLE DEVELOPER/DESIGNER TOOLS
Using PL/SQL
Oracle7 Application Tuning Developer/2000 Forms 4.5
Advanced PL/SQL Workshop Developer/2000 Reports 2.5
Oracle7 Precompiler Interface Developing Visual Basic Applications
Using Oracle7
Oracle Designer/2000 Workshop
- --------------------------------------------------------------------------------
MICROSOFT TECHNOLOGY
- --------------------------------------------------------------------------------
ACCESS EXCHANGE SERVER
Introduction to Microsoft Access 7.0 Installing and Configuring Microsoft
Exchange Server 4.0
Intermediate Microsoft Access 7.0 Installing and Configuring Microsoft
Exchange Server 5.0
Advanced Microsoft Access 7.0
Creating Applications with Access Core Technologies of Microsoft
2.0/7.0 Exchange Server 4.5
Programming with Microsoft Access Microsoft Exchange Server Multisite
for Windows 95 and Internet Environments
Microsoft Access 7: Introduction Microsoft Exchange Server Support
Microsoft Access 7: Advanced Implementing MS Mail 3.5
C++ Mastering Microsoft Exchange
Development
Programming in Microsoft Visual C++ FOXPRO
for C Programmers
Programming in Visual C++ Programming in Microsoft Visual
FoxPro 3.0 for Windows
EXCEL
Application Development with Excel
5.0
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<PAGE>
MICROSOFT TECHNOLOGY
- --------------------------------------------------------------------------------
GENERAL SYSTEM SUPPORT
Migrating to Windows 95 Using
Systems Management Server 1.1
Supporting Microsoft Systems
Management Server 1.2
Planning a Microsoft Systems
Management Server Site 1.2
Internetworking Microsoft TCP/IP on
Microsoft Windows NT 3.5
Internetworking Microsoft TCP/IP on
Microsoft Windows NT 4.0
Supporting SNA Server 3.0
OFFICE
Mastering Microsoft Office 97
Development
Installing and Supporting Microsoft
Office 97
PROJECT
Introduction to Project 4.1
Intermediate/Advanced Project 4.1
SQL SERVER
Fast Track 1: Microsoft SQL Server
Fundamentals
System Administration for Microsoft
SQL Server 6.5
Implementing a Database Design on
Microsoft SQL Server 6.5
Performance Tuning and Optimization
of Microsoft SQL Server 6.5
Microsoft SQL Server Training
New Features of SQL Server 6.5
VISUAL BASIC
Fundamentals of Microsoft Visual
Basic 4.0
Programming with Microsoft Visual
Basic 4.0
Mastering Microsoft Visual Basic 4.0
Mastering Microsoft Visual Basic
Version 5.0
Mastering Microsoft Visual Basic 5.0
Fundamentals
VBA Fundamentals
WINDOWS PROGRAMMING
Microsoft Windows Operating Systems
and Services Architecture
Fundamentals of Programming
Microsoft Foundation Class Library
Applications
Intermediate Windows-Based
Programming Using MFC Libraries
Mastering MFC Development
Programming with Windows NT using C
Windows & Windows 95 Support
SUPPORTING MICROSOFT WINDOWS 95
Installing and Configuring Microsoft
Windows 95
Microsoft Windows 95 Training
Supporting Windows for Workgroups
Accelerated Training for Windows 3.1
& Windows for Workgroups 3.11
Supporting Windows 3.1 and DOS 6.2
WINDOWS NT 3.51
Supporting Microsoft Windows NT
Server 3.51
Accelerated Training for Microsoft
Windows NT 3.51
Supporting Microsoft Windows NT 3.51
Microsoft Windows NT Training
WINDOWS NT 4.0
Supporting Microsoft Windows NT
4.0--Core Technologies
Accelerated Training for Microsoft
Windows NT 4.0
Administering Microsoft Windows NT
4.0
Installing and Configuring Microsoft
Windows NT Server 4.0
Supporting Microsoft Windows NT
4.0--Enterprise Technologies
Enterprise Series: Implementing
Directory Services Using MS Windows
NT Server 4.0
Enterprise Series: Microsoft Windows
NT Server 4.0 Server Analysis and
Optimization
Enterprise Series: Microsoft Windows
NT Server 4.0 Network Analysis and
Optimization
Enterprise Series: Troubleshooting
Microsoft Windows NT Server 4.0 in
the Enterprise
Microsoft Windows NT 4.0 Network
Administration Training
Microsoft Windows NT 4.0 Technical
Support Training
Installing and Configuring Microsoft
Windows NT Workstation 4.0
Microsoft Windows NT 4.0 Overview
Windows NT 4.0 Upgrade
32
<PAGE>
SUN TECHNOLOGY
- --------------------------------------------------------------------------------
Solaris 2.X System Administration Solaris 2.X NIS+ Administration
Essentials with Workshop
Introduction to Solaris 2.X System Programming for Beginners with Java
Administration
Introduction to Java Programming
Solaris 1.X to Solaris 2.X System
Administration
Introduction to Java Programming
(Win95 Version)
Solaris 2.X System Administration
Java Application Programming
Managing Your Network Using SunNet
Manager
Advanced Java Programming Workshop
Solaris 2.X Network Administration
Solaris 2.X NIS+ Administration
with Workshop
- --------------------------------------------------------------------------------
INTERNET/INTRANET TECHNOLOGY
- --------------------------------------------------------------------------------
Mastering Internet Development with Supporting Microsoft Proxy Server
ActiveX Technologies
Mastering Enterprise Web Site
Internet Development with ActiveX Development
and Visual Basic Script
Microsoft Web Site Essentials
Introduction to Oracle PowerBrowser
Mastering Microsoft Visual J++
Web Authoring and Design with
Microsoft Internet Explorer Implementing Normandy Server
Microsoft Internet Information Implementing Microsoft Merchant
Server 2.0 Training Server
Implementing Internet Services in a Installing Microsoft Internet
Microsoft Network Information Server
Creating and Configuring a Web Supporting Microsoft Internet
Server Using Microsoft Tools Information Server 2.0
Administering and Supporting FrontPage Introduction
Microsoft FrontPage 97
- --------------------------------------------------------------------------------
GENERAL TECHNOLOGY
- --------------------------------------------------------------------------------
Networking Essentials New Technology Seminar for Managers
Introduction to C Programming Relational Technology--Executive
Director Overview
Introduction to UNIX
Understanding Object Technology
UNIX Korn Shell Programming
Relational Database Design Concepts
The following is a case study:
ARIS is a leading provider of Microsoft training through the ATEC
channel. In addition, Microsoft frequently engages ARIS for
development and delivery of training programs for Microsoft personnel,
Microsoft Partners, and the Solution Provider channel. ARIS has
participated in pre-release training for Microsoft on Windows 95,
Systems Management Server, SNA Server, Exchange Server, Internet
Information Server, Merchant Server, Microsoft Commercial Internet
Server, Visual Basic and, most recently, Microsoft NT Server Cluster
Technologies. ARIS believes it has facilitated the early adoption of
Microsoft technologies by delivering training in Microsoft
technologies in North America, Europe, Asia, Latin America, Africa and
Australia.
33
<PAGE>
RELATIONSHIPS WITH KEY VENDORS
The Company has developed strategic relationships with key vendors of
software, particularly Oracle, Microsoft and Sun. The Company participates in
a number of software application implementation programs established under the
Oracle Alliance Program, including membership as an authorized Oracle Reseller
and as a Complementary Software Provider (CSP). The Company also participates
in two of Oracle's Alliance Technology Initiatives, the Oracle Cooperative
Applications Initiative (CAI) and the Oracle System Management Tools
Initiative (SMTI). The Company has received a number of endorsements and
certifications from these vendors, including designation as a Microsoft
Solution Provider Partner, a Microsoft ATEC and a Sun Educational Services
U.S. Strategic Partner. These strategic relationships allow the Company to
gain access to beta versions of software and the software vendor's 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 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. See "Risk Factors--Dependence on Key Vendors of Software" and "--
Competition."
SALES AND MARKETING
The Company sells its consulting and training services directly through its
regional sales forces. As of March 31, 1997, the Company had eight account
executives selling consulting services and five account executives and 11
telemarketing representatives selling training services. Software products are
sold by three 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.
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<PAGE>
CLIENTS
The Company performs professional services for clients across a broad range
of industries and governmental entities. Set forth below is a representative
list of clients which generated at least $100,000 in revenue for the Company
or Oxford in 1996 and the services and products provided to them:
<TABLE>
<CAPTION>
NAME OF CLIENT CONSULTING TRAINING SOFTWARE
-------------- ---------- -------- --------
<S> <C> <C> <C>
Alaska Department of Transportation and Public
Facilities....................................... [X]
British Broadcasting Company (UK)................. [X]
City of Seattle................................... [X] [X] [X]
Channel Four Television Corporation (UK).......... [X]
Eagle Insurance Group............................. [X] [X]
ESCO Corporation.................................. [X] [X] [X]
Government Technology Service, Inc................ [X]
Hewlett Packard Company........................... [X]
Home Buyers Warranty.............................. [X] [X]
King County Department of Metropolitan Services... [X] [X] [X]
Lockheed Martin Corporation....................... [X] [X]
Micron Electronics, Inc. ......................... [X]
Microsoft Corporation............................. [X] [X]
National Westminster Group (UK)................... [X]
Nike, Inc......................................... [X] [X]
Oregon Health Sciences University................. [X] [X]
Quantum Corporation............................... [X] [X]
Quebecor, Inc..................................... [X] [X]
SCITEX America Corp. ............................. [X] [X]
Starbucks Coffee Company.......................... [X]
Sun Microsystems, Inc. ........................... [X]
Tektronix, Inc.................................... [X] [X] [X]
The Boeing Company................................ [X] [X] [X]
The Gates Rubber Company.......................... [X] [X]
TIG Holdings...................................... [X]
Tosco Northwest Company........................... [X] [X] [X]
U.S. Coast Guard.................................. [X]
U.S. General Services Administration.............. [X]
U.S. Internal Revenue Service..................... [X] [X]
Washington State Department of Transportation..... [X]
Washington State Department of Natural Resources.. [X] [X]
Weyerhaeuser Company.............................. [X] [X] [X]
</TABLE>
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. One
client, Tektronix, accounted for 9.1%, 21.8% and 20.0% of the Company's total
revenue in 1996, 1995 and 1994, respectively. 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. See "Risk Factors--Customer Concentration."
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
35
<PAGE>
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 Business Machines and Hewlett-Packard, software vendors, other
Microsoft ATECs, and independent international, national and regional training
companies.
The Company focuses its software product development on solving problems
that few other software companies have addressed. The Company's software
product, 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. See "Risk Factors--Competition."
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. See "Risk Factors--
Intellectual Property Rights."
PERSONNEL AND HUMAN RESOURCES
As of May 26, 1997, the Company had 388 full-time employees, 290 of whom
were in the United States and 98 of whom were in the United Kingdom. Of this
total, 119 employees were involved in the sales, delivery and support of
training services, 184 employees were involved in the sales, delivery and
support of consulting services, 17 employees were involved in the sales,
marketing, development and support of software products, and 68 were involved
in corporate
36
<PAGE>
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
three 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.
The Company's compensation package consists of a combination of salary,
stock options and benefits plans. In addition, the Company awards performance-
based bonuses to certain employees, including nearly all of its consultants,
project managers and instructors. 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.
The Company's success will depend in part on the continued services of its
key employees. As a result, the Company has entered into employment agreements
containing non-competition, non-disclosure and non-solicitation covenants with
all of its management, consultants, project managers and instructors, except
Mr. Paul Y. Song.
37
<PAGE>
FACILITIES
The Company's headquarters is located at 6720 Fort Dent Way, Suite 250,
Seattle, Washington. The Company leases approximately 9,000 square feet in two
buildings in this business complex. The Company and its subsidiaries also
lease facilities in various locations listed in the table below (as of May 26,
1997).
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE NO. OF
LOCATION FOOTAGE CLASSROOMS FUNCTION
-------- ----------- ---------- --------
<S> <C> <C> <C>
Seattle, WA................. 9,000 -- Corporate headquarters,
consulting headquarters
Bellevue, WA................ 15,000 6 Training headquarters
(Seattle area)
Bellevue, WA................ 8,000 5 ARIS Software, Inc.
(Seattle area) headquarters, training
Beaverton, OR............... 7,000 4 Consulting, training,
(Portland area) software
Denver, CO.................. 3,000 2 Consulting, training
Denver, CO.................. 7,000 5 Training
Dallas, TX.................. 7,000 -- Consulting
Fairfax, VA................. 10,500 5 Training, consulting
(Washington, D.C. area)
Tampa, FL................... 2,000 -- Consulting
London, U.K................. 6,500 9 Training
London, U.K................. 1,250 3 Training (not currently
in use)
Oxford, U.K................. 5,000 -- Oxford headquarters
Birmingham, U.K............. 2,500 4 Training
Oxford, U.K................. 4,000 4 Training
</TABLE>
LEGAL PROCEEDINGS
The Company is from time to time involved in legal proceedings that arise
out of the normal course of business. As of May 26, 1997, the Company was not
involved in any material legal proceedings.
38
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company and their
ages as of March 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul Y. Song..................... 34 President, Chief Executive Officer and
Chairman of the Board
Kendall W. Kunz.................. 33 Senior Vice President of Western
Operations and Director
John Y. Song..................... 35 Vice President of Eastern Operations
Thomas W. Averill................ 52 Vice President of Finance and Chief
Financial Officer
Jeffrey W. Gilles................ 46 Vice President of Training Business
Development
John J. Griffin.................. 39 Vice President of Sales and Marketing
David W. Melin................... 41 President of ARIS Software, Inc. and
Noetix Corporation
Hugh Simpson-Wells............... 40 Managing Director of Oxford Computer
Group Limited
Norbert W. Sugayan, Jr........... 36 General Counsel and Secretary
Tina J. Song..................... 33 Director of Human Resources and
Information Technology
Bruce R. Kennedy(1)(2)........... 58 Director
Kenneth A. Williams(1)(2)........ 42 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
PAUL Y. SONG, founder of the Company, has been the Company's President,
Chief Executive Officer and Chairman since its incorporation in October 1990.
Mr. Song also serves as Chairman of the Company's subsidiaries, Oxford, ARIS
Software Inc. ("ASI"), and ASI's wholly-owned subsidiary, Noetix. From 1988 to
1990, Mr. Song was employed by Oracle's Consulting division in a number of
capacities. Mr. Song received a B.S. degree in Electrical Engineering from the
General Motors Institute and an M.S. degree in Computer Science from the
Massachusetts Institute of Technology. Paul Y. Song is the husband of Tina J.
Song and the brother of John Y. Song.
KENDALL W. KUNZ was appointed as the Company's Senior Vice President of
Western Operations and a Director in March 1997. Mr. Kunz is responsible for
the Company's consulting and training operations in the Western United States,
including Washington, Oregon, Colorado and Texas. Mr. Kunz served as the
Company's Senior Vice President of Education from October 1996 to March 1997.
From August 1995 to October 1996, Mr. Kunz was the Company's Vice President of
Consulting and from June 1994 to August 1995, Mr. Kunz served as Vice
President of Sales and Marketing. From July 1992 until June 1994, Mr. Kunz
served as the Company's Director of Sales and Marketing. Between June 1988 and
July 1992, Mr. Kunz was employed by Oracle in a number of capacities. Mr. Kunz
received a B.S. degree in Management from Purdue University.
JOHN Y. SONG was appointed as the Company's Vice President of Eastern
Operations in March 1997. Mr. Song is responsible for the Company's consulting
and training operations in the Eastern United States, including the Washington
D.C. area and Florida. Mr. Song served as the Company's Vice President of
Business Development from September 1996 to March 1997.
39
<PAGE>
From March 1996 to August 1996, Mr. Song was the Company's Executive Director
for the Federal and Public Sector and from February 1991 to February 1996, Mr.
Song was Director of Business Development of the Company. Prior to joining the
Company, Mr. Song worked in Hong Kong for Hill and Knowlton, a public
relations firm, and in Seoul, Republic of Korea for Lee and Associates, a
management consulting firm. Mr. Song received a B.A. degree in Journalism from
Western Washington University and an M.B.A. degree from the Graduate School of
International Studies at Yonsei University (Republic of Korea). John Y. Song
is the brother of Paul Y. Song.
THOMAS W. AVERILL has served as Vice President of Finance and Chief
Financial Officer since joining ARIS in July 1996 and is responsible for the
Company's financial and administrative operations. Mr. Averill has also served
as the Chief Financial Officer and a Director of ASI and Noetix since August
1996 and October 1996, respectively, and a Director of Oxford since March
1997. From November 1994 to July 1996, Mr. Averill was self-employed as a
private business and finance consultant. Between November 1992 and November
1995, Mr. Averill also was a Vice President of Finance and a director of Simon
Golub and Sons, Inc., a manufacturer and international wholesale distributor
of personal time pieces and fine jewelry. From 1990 to 1992, Mr. Averill was
an employee of and consultant to Paragon Computer Corp. and was the Vice
President of Finance of Paragon Computer Technology Corp., both of which are
computer systems integration companies.
JEFFREY W. GILLES has served as the Company's Vice President of Training
Business Development since October 1996. Mr. Gilles is responsible for
creating business alliances, developing online training capabilities, and new
product research and development. From January 1995 to October 1996, Mr.
Gilles was Vice President of Education of the Company, responsible for the
Company's training operations. From June 1992 to December 1994, Mr. Gilles was
the President of Clarity. From July 1988 to June 1992, Mr. Gilles was Regional
Education Manager for Oracle. Mr. Gilles received a B.A. degree in
Broadcasting and Film, a B.S. degree in Computer Science and an M.S. degree in
Computer Science from the University of Iowa.
JOHN J. GRIFFIN has served as the Company's Vice President of Sales and
Marketing since July 1996. From 1988 to 1996, Mr. Griffin held various sales
and account management positions at Oracle and, immediately prior to joining
the Company, was Oracle's Global Account Manager for the Boeing Company. Prior
to joining Oracle, Mr. Griffin held technical, management and sales positions
for a number of companies. Mr. Griffin received a B.A. degree in
Organizational Communications from the University of Utah.
DAVID W. MELIN has served as President and a Director of ASI and Noetix
since August 1996 and October 1996, respectively. From 1990 to 1996, Mr. Melin
owned and operated Allied Bolt Co., an industrial fastener distribution and
manufacturing company. Mr. Melin was Product Manager for MS-DOS and Microsoft
LAN Manager at Microsoft from 1984 to 1989. Mr. Melin received a B.A. degree
in Mechanical Engineering from the University of Washington and an M.S. degree
in Engineering Management from Stanford University.
HUGH SIMPSON-WELLS is Managing Director and Secretary of Oxford, the U.K.
subsidiary of the Company, and is responsible for all operations of Oxford.
Mr. Simpson-Wells founded Oxford in 1983. Prior to founding Oxford, Mr.
Simpson-Wells was an engineer with the Ford Motor Company in the United
Kingdom. Mr. Simpson-Wells received an M.S. degree in Engineering Science from
Oxford University.
NORBERT W. SUGAYAN, JR. has served as the Company's General Counsel since
February 1996, its Secretary since April 1997 and as Secretary of ASI and
Noetix since November 1996. Prior to joining the Company on a full-time basis,
Mr. Sugayan practiced law with private law
40
<PAGE>
firms in Seattle, Washington, as of counsel to Lane Powell Spears Lubersky
from February 1996 to December 1996, as a principal of Harris, Sugayan & Hull
from March 1994 to February 1996 and as an attorney with Bogle & Gates from
February 1992 to March 1994. Prior to February 1992, Mr. Sugayan practiced law
in Seoul, Republic of Korea and Dallas, Texas. Mr. Sugayan received a B.A.
degree in Economics and English from the University of Michigan, a J.D. degree
from the University of Notre Dame Law School, and an L.L.M. degree in
Corporations Law from New York University.
TINA J. SONG has served as the Company's Director of Human Resources and
Information Technology since January 1995. Ms. Song was a Vice President of
the Company from October 1990 until March 1996, and was a Director of the
Company from October 1990 until November 1994. From April 1993 to January
1995, Ms. Song was also the Company's Consulting Resource Manager. Ms. Song
received a B.S. degree in Electrical Engineering from the General Motors
Institute. Ms. Song is the wife of Paul Y. Song.
BRUCE R. KENNEDY was appointed as a Director of the Company in March 1997.
Mr. Kennedy is Chairman Emeritus of Alaska Air Group, Inc., a New York Stock
Exchange listed airline holding company. Since 1991, Mr. Kennedy has served as
a Director, and as Chairman of the Executive Committee of the Board, of Alaska
Air Group, Inc. He served as Chairman, Chief Executive Officer and President
of Alaska Air Group, Inc., Chairman, Chief Executive Officer and President of
Alaska Airlines, Inc. and as Chairman of Horizon Air Industries, Inc., a
regional airline, from 1979 to 1991.
KENNETH A. WILLIAMS was appointed as a Director of the Company in March
1997. From 1996 to the present, Mr. Williams has been Vice Chairman and a
director of CUC International, a consumer services company. He is also a
member of the Office of the President of CUC International. Prior to joining
CUC International, Mr. Williams was the Chairman of the Board and Chief
Executive Officer of Sierra On-Line, Inc., a consumer software company which
he co-founded in 1979 and which was acquired by CUC International in 1996.
The Board of Directors of the Company is divided into three classes. One
class is elected at each annual meeting of shareholders, with the members of
each class holding office for a three-year term and until successors of such
class have been elected and qualified. Messrs. Song and Kennedy serve as Class
I directors until the annual meeting of shareholders held in 2000, or until
their respective successors have been elected and qualified. Mr. Williams
serves as a Class II director until the annual meeting of shareholders held in
1999, or until his successor has been elected and qualified. Mr. Kunz serves
as a Class III director until the annual meeting of shareholders held in 1998,
or until his successor has been elected and qualified.
BOARD COMMITTEES
The Board of Directors has created an Audit Committee and a Compensation
Committee. The Audit Committee consists of Mr. Kennedy (Chair) and Mr.
Williams. Among other functions, the Audit Committee makes recommendations to
the Board of Directors regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, reviews the Company's balance sheet, statement
of operations and cash flows and reviews and evaluates the Company's internal
control functions.
The Compensation Committee consists of Mr. Williams (Chair) and Mr. Kennedy.
The Compensation Committee reviews and approves the compensation and benefits
for the Company's executive officers, administers the Company's stock option
plans and makes recommendations to the Board of Directors regarding the
Company's compensation policies.
41
<PAGE>
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors or members of the committees of the Board of Directors, but are
reimbursed for their reasonable expenses incurred in attending Board and
committee meetings. In addition, each non-employee director is entitled to
receive stock options pursuant to the automatic grant provisions of the
Company's 1997 Stock Option Plan. See "--Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Paul Y. Song was the sole director of the Company during 1996 and made
all decisions concerning the compensation of executive officers, including his
own.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information regarding compensation earned by the Company's Chief Executive
Officer and the other executive officers who earned in excess of $100,000 in
salary and bonus during fiscal 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Paul Y. Song..................................... $120,000 $90,553 $3,655(1)
President and Chief Executive Officer
Kendall W. Kunz.................................. 108,000 81,644 1,190(1)
Senior Vice President of Western Operations
Jeffrey W. Gilles................................ 102,000 74,830 --
Vice President of Training Business Development
John Y. Song..................................... 76,000 53,680 3,046(1)
Vice President of Eastern Operations
</TABLE>
- --------
(1) Represents amount paid by the Company for automobile expenses.
STOCK OPTION PLANS
1997 STOCK OPTION PLAN. On March 13, 1997, the Board of Directors adopted
the 1997 Stock Option Plan, which received shareholder approval at the
Company's annual meeting of shareholders held on April 25, 1997. As of May 26,
1997, options to purchase 90,934 shares were outstanding under the 1997 Stock
Option Plan, with a weighted average price of $9.40 per share, none of which
had been exercised. The aggregate number of shares reserved for issuance under
the 1997 Stock Option Plan is two million shares, less the 1,134,091 shares
that have been granted and not subsequently become available for future grant
under the Company's 1995 Stock Option Plan, and subject to certain other
adjustments. The 1997 Stock Option Plan is administered by the Compensation
Committee of the Board of Directors (the "Plan Administrator") and provides
for the grant of options to purchase shares of the Company's Common Stock to
employees, officers and directors of, and consultants to, the Company. Options
granted may be either incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory
stock options ("NSOs"). The recipients of grants, the number of options
granted, and other terms and conditions of options granted under the 1997
Stock Option Plan are to be determined in the discretion of the Plan
Administrator, except that the 1997 Stock Option Plan provides for automatic,
non-discretionary grants of 5,000 NSOs to non-employee directors (as defined
under Rule 16b-3 promulgated pursuant to the Exchange Act) for each year of
service (or portion thereof) on the Board of Directors of the Company.
42
<PAGE>
Under the terms of the 1997 Stock Option Plan, ISOs may be issued only to
employees of the Company or employees of any present or future subsidiary of
the Company. After the date of this Prospectus, the exercise price of ISOs
granted under the 1997 Stock Option Plan may not be less than 100% of the fair
market value of the Common Stock at the time of the grant (or less than 110%
in the case of a holder of 10% or more of the total voting power of the
Company). ISOs will have a maximum term of ten years from the date of grant
(five years in the case of a holder of greater than 10% of the total voting
power of the Company), and will generally vest over a period of four years.
The aggregate fair market value (as determined at the time of grant) of shares
with respect to which ISOs are excercisable for the first time by an optionee
in any one calender year may not exceed $100,000. After the date of this
Prospectus, NSOs granted under the 1997 Stock Option Plan will have an
exercise price of not less than 100% of the fair market value of the Common
Stock at the time of the grant, and will have a maximum term of ten years from
the date of grant. Fair market value of the Common Stock will be determined by
the Plan Administrator. Options granted under the 1997 Stock Option Plan will
not be transferable other than by will or the laws of descent and
distribution, except that NSOs will also be transferable pursuant to a
domestic relations order.
1995 STOCK OPTION PLAN. As of May 26, 1997, options to purchase 1,112,091
shares were outstanding under the Company's 1995 Stock Option Plan, with a
weighted-average exercise price of $4.95 per share, and options to purchase
22,000 shares had been exercised. ISOs granted under the 1995 Stock Option
Plan generally have a maximum term of ten years from the date of grant, and
vest over a period of five years. NSOs granted under the 1995 Stock Option
Plan generally have a maximum term of seven years. Options granted under the
1995 Stock Option Plan are not transferable other than by will or the laws of
descent and distribution. In connection with the adoption of the 1997 Stock
Option Plan in March 1997, the Board of Directors determined that it would not
make any future grants under the 1995 Stock Option Plan.
Prior to January 1995, the Company from time to time granted NSOs to key
employees. These grants were not made pursuant to any formal policy or plan.
EMPLOYMENT AGREEMENTS
Each of the Named Executive Officers except Mr. Paul Y. Song has an
employment agreement with the Company. Mr. Kendall W. Kunz's employment
agreement provides for his employment as an officer of the Company for an
indefinite period, subject to the right of either party to terminate upon 30
days' prior written notice. Mr. John Y. Song's employment agreement provides
for his employment as an officer of the Company for an indefinite period,
subject to the right of either party to terminate upon 14 days' prior written
notice. Mr. Jeffrey W. Gilles' employment agreement provides for his
employment as an officer of the Company through December 31, 1997, subject to
the right of either party to terminate upon prior written notice. Each such
employment agreement other than Mr. Gilles' provides for termination by the
Company for cause effective immediately upon notice to the employee. In
addition, each such employment agreement provides for an annual bonus based
upon the achievement of goals (such as revenue and income) as set annually by
the Board of Directors and also contains other terms customarily found in
executive officer agreements, including provisions relating to the
reimbursement of certain business expenses, participation in employee benefit
plans available to other executive officers and employees of the Company,
confidentiality, non-competition and non-solicitation.
43
<PAGE>
CERTAIN TRANSACTIONS
On January 1, 1995, the Company issued 560,000 shares of Common Stock to
Jeffrey W. Gilles, the Company's Vice President of Training Business
Development, in connection with the Company's acquisition of the capital stock
of Clarity.
On March 31, 1995, the Company issued 120,000 shares of Common Stock to
Kendall W. Kunz, the Company's Senior Vice President of Western Operations and
a Director, in connection with his exercise of options granted in connection
with his employment by the Company.
On April 3, 1995, the Company issued 200,000 shares of Common Stock to
John Y. Song, the Company's Vice President of Eastern Operations, in
connection with his exercise of options granted in connection with his
employment by the Company.
On October 11, 1995, the Company issued 80,000 shares of Common Stock to Mr.
Kunz in connection with his exercise of options granted in connection with his
employment by the Company.
On November 15, 1995, the Company issued 120,000 shares of Common Stock to
Mr. Kunz in connection with his exercise of options granted in connection with
his employment by the Company.
On May 1, 1996, the Company issued 540,254 shares of Common Stock to
Stephen J. Brugger in connection with the Company's acquisition of the capital
stock of SQLSoft.
On February 28, 1997, the Company issued 103,460 shares of Common Stock to
Hugh Simpson-Wells, the Managing Director and Secretary of Oxford, in
connection with the Company's acquisition of the capital stock of Oxford.
On February 28, 1997, the Company repurchased, 100,000 shares of Common
Stock at $9.75 per share from Mr. Gilles, and 30,000 shares of Common Stock at
$9.75 per share from Mr. Brugger, an employee of the Company and beneficial
owner of more than 5% of the Common Stock prior to the closing of this
Offering. The Company repurchased these shares following discussions between
two third parties unaffiliated with the Company and certain shareholders of
the Company regarding the third parties' interest in acquiring an equity stake
in the Company and obtaining a seat on the Board of Directors. The Board of
Directors determined that the repurchase was in the best interests of, and on
terms fair and reasonable to, the Company.
44
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of May 26, 1997 by: (i)
each of the directors and Named Executive Officers of the Company; (ii) each
other person known by the Company to own beneficially more than 5% of the
Common Stock; (iii) each Selling Shareholder; and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING SHARES OFFERING
----------------------- BEING -----------------------
NUMBER PERCENT(1)(2) OFFERED NUMBER PERCENT(1)(2)
--------- ------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
AND DIRECTORS
Paul Y. Song(3)......... 3,948,000 53.2% -- 3,948,000 41.9%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
Jeffrey W. Gilles....... 460,000 6.2% -- 460,000 4.9%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
Kendall W. Kunz......... 320,000 4.3% -- 320,000 3.4%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
John Y. Song............ 195,500 2.6% -- 195,500 2.1%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
Bruce R. Kennedy........ 12,500 * -- 12,500 *
16430 Ambaum Boulevard
South
Seattle, Washington
98148
Kenneth A. Williams..... -- * -- -- *
8434 North Mercer Way
Mercer Island,
Washington 98040
OTHER 5% SHAREHOLDERS
Tina J. Song(3)......... 1,172,000 15.8% -- 1,172,000 12.4%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
Song Family Ltd.
Partnership............ 650,000 8.8% -- 650,000 6.9%
3700 First Interstate
Center
999 Third Avenue
Seattle, Washington
98104
Stephen J. Brugger(4)... 505,494 6.8% -- 505,494 5.4%
6720 Fort Dent Way,
Suite 250
Seattle, Washington
98188-2555
SELLING SHAREHOLDERS
Ian C.H. Cunningham..... 66,500 * 13,300 52,200 *
Shepherd's Cottage
Oxford OX44 9DB
United Kingdom
Hugh Simpson-Wells...... 103,460 1.4% 7,500 95,960 1.0%
33 Hurst Rise Road
Oxford OX2 9HE
United Kingdom
ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A
GROUP (12 PERSONS)..... 5,633,960 75.9% 7,500 5,626,460 60.0%
</TABLE>
- -------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Common Stock subject to options currently exercisable or
exercisable within 60 days of May 26, 1997 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
option but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except where indicated, and
subject to community property laws where applicable, the persons in the
table above have sole voting and investment power with respect to all
Common Stock shown as beneficially owned by them.
(3) Includes 650,000 shares registered in the name of Song Family Limited
Partnership, over which Paul Song and Tina Song share voting and
dispositive power.
(4) Includes 2,000 shares registered in the name of Aidan J. Brugger Trust,
40,000 shares registered in the name of Brugger Family Children Trust, and
2,760 shares registered in the name of Aidan J. Brugger, over all of which
Stephen J. Brugger exercises voting and dispositive power.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of 100,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, without par value (the
"Preferred Stock"). The following summary description of the Company's capital
stock is qualified in its entirety by reference to the Restated Articles and
the Restated Bylaws of the Company, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
On March 31, 1997, there were 7,423,900 shares of Common Stock outstanding,
held of record by 60 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of shareholders. There are
no cumulative voting rights for the election of directors. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor, subject to
preferences that may be applicable to any outstanding Preferred Stock. In the
event of the liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All outstanding shares of Common Stock are,
and all shares of Common Stock to be outstanding upon completion of this
Offering will be, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Restated Articles, the Company's Board of
Directors has the authority, without further action by the shareholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to
fix designations and powers, preferences and relative rights of such shares,
and to increase or decrease the number of shares of any series subsequent to
the issue of that series, but not below the number of shares of such series
then outstanding. Shares of Preferred Stock which may be redeemed, purchased
or acquired by the Company may be reissued except as otherwise provided by
law. The issuance of Preferred Stock in certain circumstances may delay, deter
or prevent a change in control of the Company, may discourage bids for the
Common Stock at a premium over its market price and may adversely affect the
market price of, and the voting and other rights of the holders of, the Common
Stock. The Company currently has no plans to issue any Preferred Stock.
WARRANT
As of May 26, 1997, there was one warrant outstanding to purchase 4,000
shares of Common Stock at a purchase price of $10.00 per share which was
granted to the Company's counsel for legal services rendered in connection
with this Offering. The warrant is currently exercisable in whole or in part,
at any time and from time to time until February 2002. The warrant contains
certain protections against dilution resulting from stock splits, stock
dividends and similar events. The warrant may be exercised for cash or
pursuant to certain cashless exercise provisions.
REGISTRATION RIGHTS
In connection with the October 1996 purchase of SofTeach, the Company
granted certain registration rights to the former shareholders of SofTeach
(the "SofTeach Shareholders") who hold an aggregate of 42,000 shares of Common
Stock. In connection with the February 1997 acquisition of Oxford, the Company
granted certain "piggy-back" registration rights to the former shareholders of
Oxford (the "Oxford Shareholders") who hold an aggregate of 280,000
46
<PAGE>
shares of Common Stock. At any time and from time to time after the date of
this Prospectus under certain circumstances and limitations, the SofTeach
Shareholders and the Oxford Shareholders may include their shares in any
registration of the Company's Common Stock under the Securities Act on a form
which permits registration of secondary shares, other than a registration
relating solely to employee benefit plans, or a registration relating solely
to a transaction under Rule 145 of the Securities Act, a transaction relating
solely to the sale of debt or convertible debt instruments or a registration
on any form (other than Form S-1, S-2 or S-3, or their successor forms) which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of such shares of
Common Stock. In addition, one of the Oxford Shareholders, Mr. Ian C.H.
Cunningham, has the right to include up to 13,300 shares of Common Stock in
this Offering, and has elected to do so. See "Principal and Selling
Shareholders" and "Shares Eligible for Future Sale."
WASHINGTON ANTI-TAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. In addition,
Chapter 23B.19 of the WBCA prohibits a corporation, with certain exceptions,
from engaging in certain significant business transactions with an "Acquiring
Person" (defined as a person who acquires 10% or more of the corporation's
voting securities without the prior approval of the corporation's board of
directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to,
or issuance or redemption of stock to or from, the Acquiring Person, or
allowing the Acquiring Person to receive any disproportionate benefit as a
shareholder. An Acquiring Person is further prohibited from engaging in
significant business transactions with the target corporation unless the per
share consideration paid to holders of outstanding shares of Common Stock and
other classes of stock of the target corporation meet certain minimum
criteria; provided, however, pursuant to recent legislative revisions
effective July 27, 1997, the per share minimum criteria referenced above apply
only to significant business transactions involving either (i) a merger, share
exchange, or consolidation of a target corporation with an Acquiring Person or
an affiliate or associate of the Acquiring Person, or (ii) the liquidation or
dissolution of a target corporation proposed by, or pursuant to an agreement,
arrangement, or understanding with an Acquiring Person or an affiliate or
associate of an Acquiring Person, which transaction is not otherwise approved
by an affirmative vote of a majority of the disinterested shareholders of the
target corporation. These provisions may have the effect of delaying,
deterring or preventing a change in control of the Company.
CERTAIN PROVISIONS IN RESTATED ARTICLES AND RESTATED BYLAWS
Pursuant to the Company's Restated Articles, the Board of Directors of the
Company is divided into three classes, as nearly equal in number as possible.
One class is elected at each annual meeting of the shareholders, with the
members of each class holding office for a three-year term or until successors
of such class have been elected and qualified. The Company's Restated Bylaws
provide that: (i) the Board of Directors consists of seven persons or so many
as may from time to time be designated by the then-existing Board of
Directors: (ii) vacancies in the Board of Directors may be filled by the
affirmative vote of a majority of the remaining directors in office though
less than a quorum of the Board of Directors; (iii) the entire Board of
Directors, or any member thereof, may be removed only by the affirmative vote
of at least two-thirds of shares then present and entitled to vote at an
election of such directors at a special meeting of shareholders called
expressly for that purpose; and (iv) director nominations not made in
accordance with certain notice provisions may, at the discretion of the
Chairman of the Board, be disregarded. It is possible that the provisions
discussed above may delay, deter or prevent a change in control of the
Company.
47
<PAGE>
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Restated Articles provide that no director shall be personally liable to
the Company or its shareholders for monetary damages for conduct as a
director, excluding, however, liability for acts or omissions involving
intentional misconduct or knowing violations of law, illegal distributions or
transactions from which the director receives benefits to which the director
is not legally entitled. In addition, the Restated Bylaws provide for broad
indemnification by the Company of its officers and directors in accordance
with Washington law. Insofar as the indemnity for liabilities arising under
the Securities Act may be permitted to directors or officers of the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, 520 Pike Street, Suite 1220, Seattle, Washington 98101.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,423,900 shares of
Common Stock outstanding, assuming no exercise of the over-allotment option
and no exercise of outstanding options and warrants. All of the 2,020,800
shares of Common Stock sold in this Offering are freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by affiliates of the Company ("Affiliates") (as defined in
Rule 144 under the Securities Act). The 7,423,900 shares of Common Stock
outstanding prior to this Offering were issued and sold without registration
under the Securities Act and public sale thereof in the United States will be
restricted except to the extent such shares are registered under the
Securities Act or sold in accordance with an applicable exemption from
registration. Of the 7,423,900 shares of Common Stock outstanding prior to
this Offering, 280,000 shares were issued to persons whom the Company believed
to be outside the United States at the time of issuance (the "Non-United
States Shares"), and thus are subject to the restrictions imposed on the
resale of such shares pursuant to Regulation S. The remaining 7,143,900 shares
were issued to persons in the United States in transactions exempt from
registration pursuant to the Securities Act. A total of 20,800 of the Non-
United States Shares are being sold pursuant to this Offering. Pursuant to
Regulation S, the remaining 259,200 Non-United States Shares may, under
certain circumstances, be resold in the United States by persons other than
Affiliates without registration under the Securities Act, immediately after
the date of this Prospectus, subject to the Lock-up Agreements.
A total of 7,327,920 shares of Common Stock held by existing shareholders
are subject to the Lock-up Agreements with Deutsche Morgan Grenfell Inc. and
may not be offered or sold or otherwise transferred until 180 days following
the closing of this Offering. Taking into account restrictions imposed by the
Securities Act, rules promulgated by the Commission thereunder and the Lock-up
Agreements, the number of additional shares that will be available for sale in
the public market, subject in some cases to the volume and other restrictions
of Rule 144 under the Securities Act, will be as follows: 6,548,160 shares
will be eligible for sale beginning 180 days after the closing of this
Offering, and 807,020 shares will be eligible for sale pursuant to Rule 144
upon the expiration of applicable holding periods, which will expire between
November 1, 1997 and March 10, 1999. Deutsche Morgan Grenfell Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to the Lock-up Agreements. Upon the closing of this
Offering, holders of 301,200 shares of Common Stock are entitled to certain
rights with respect to the registration of such shares under the Securities
Act. In addition, the Company intends to file a registration statement on Form
S-8 under the Securities Act approximately 180 days after the closing of this
Offering to register approximately 1,978,000 shares of Common Stock reserved
for issuance under the Company's 1995 Stock Option Plan and 1997 Stock Option
Plan. In addition, up to 4,000 shares of Common Stock issuable upon exercise
of an outstanding warrant will become available for sale in the public market
following the expiration of the Rule 144 holding period on February 24, 1998,
if exercised pursuant to cashless exercise provisions, or one year following
the exercise of the warrant for cash.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated under Rule 144), including an Affiliate, who has
beneficially owned restricted securities for a period of at least one year
from the later of the date such restricted securities were acquired from the
Company or the date on which they were acquired from an Affiliate, is entitled
to sell, within any three-month period commencing 90 days after the date of
this Prospectus, a number of shares that does not exceed the greater of 1.0%
of the then outstanding shares of Common Stock (approximately 94,239 shares
immediately after this Offering) or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain other provisions
49
<PAGE>
relating to notice of sale and the availability of current public information
about the Company. However, under Rule 144(k), if a period of at least two
years has elapsed between the later of the date the restricted securities were
acquired from the Company or the date on which they were acquired from an
Affiliate of the Company, a holder of such restricted securities, who is not
an Affiliate at the time of the sale and has not been an Affiliate for at
least three months prior to the sale, would be entitled to sell the shares
immediately, without regard to the availability of public information about
the Company, volume, manner of sale and notice limitations described above.
Prior to this Offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of the Common Stock in the open
market, or the availability of shares for sale, may adversely affect the
market price of the Common Stock and the ability of the Company to raise funds
through equity offerings in the future.
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Deutsche Morgan
Grenfell Inc., Montgomery Securities and Piper Jaffray Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the underwriting agreement (the form of which will be
filed as an exhibit to the Company's Registration Statement of which this
Prospectus is a part) (the "Underwriting Agreement"), to purchase from the
Company and the Selling Shareholders the number of shares of Common Stock set
forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Deutsche Morgan Grenfell Inc....................................
Montgomery Securities...........................................
Piper Jaffray Inc...............................................
---------
Total....................................................... 2,020,800
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including approval of certain
matters by counsel, and that the Underwriters will purchase all shares of
Common Stock offered hereby if any such shares are purchased.
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus.
The Underwriters may allow selected dealers a concession of not more than $
per share. The selected dealers may reallow a concession of not more than $
to certain other dealers. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part. After the Offering, the price,
concessions and re-allowances to dealers and other selling terms may be
changed by the Representatives. The Underwriters do not intend to sell any of
the shares of Common Stock offered hereby to accounts for which they exercise
discretionary authority.
The Company has granted an option to the Underwriters to purchase up to
300,000 additional shares of Common Stock at the initial public offering
price, less underwriting discounts, to cover over-allotments, if any. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to
certain
50
<PAGE>
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table, and the Company will be obligated
to sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in the Offering, if any.
The Underwriters may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Stabilizing and
syndicate covering transactions may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
In connection with the Offering, the Company, the officers and directors of
the Company, and certain other shareholders of the Company have agreed not to
offer or sell or otherwise transfer any Common Stock until the expiration of
180 days following the closing of this Offering without the prior written
consent of Deutsche Morgan Grenfell Inc.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the several Underwriters and their controlling
persons against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Company and the Representatives. The principal factors to be considered in
determining the public offering price include the information set forth in
this Prospectus and otherwise available to the Representatives, the history
and the prospects for the industry in which the Company competes, the ability
of the Company's management, the prospects for future earnings of the Company,
the present state of the Company's development and its current financial
condition, the general condition of the securities markets at the time of the
Offering, and the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies. Each of the Representatives
has informed the Company that it currently intends to make a market in the
shares subsequent to the effectiveness of the Offering, but there can be no
assurance that the Representatives will take any action to make a market in
any securities of the Company.
51
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the legality of the Common Stock offered
by this Prospectus will be passed upon for the Company and the Selling
Shareholders by Van Valkenberg Furber Law Group P.L.L.C., Seattle, Washington.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Stoel Rives LLP, Seattle, Washington.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31,
1996, and the financial statements of SofTeach for the nine-month period ended
September 30, 1996 included in this Prospectus have been so included in
reliance on the reports of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of which
this Prospectus constitutes a part, under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information
with respect to the Company and the Common Stock offered hereby. Statements
contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits filed therewith, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. Information
concerning the Company is also available for inspection at the offices of the
Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C.
20006.
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARIS CORPORATION
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet................................................ F-3
Consolidated Statement of Income.......................................... F-4
Consolidated Statement of Changes in Shareholders' Equity................. F-5
Consolidated Statement of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................ F-7
SOFTEACH CORPORATION
Report of Independent Accountants......................................... F-20
Statement of Income....................................................... F-21
Statement of Changes in Shareholders' Equity.............................. F-22
Statement of Cash Flows................................................... F-23
Notes to Financial Statements............................................. F-24
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet................................ F-27
Unaudited Pro Forma Combined Statement of Income.......................... F-28
Notes to Unaudited Pro Forma Combined Balance Sheet and Statement of
Income................................................................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
ARIS Corporation
In our opinion, the accompanying consolidated balance sheet 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 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 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
March 21, 1997
F-2
<PAGE>
ARIS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1995 1996 1997
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $1,241 $ 177 $ 485
Investments in marketable securities.......... 1,250 1,396 1,372
Accounts receivable, net of allowance for
doubtful accounts of $279, $300 and $350
(unaudited).................................. 2,738 5,169 8,612
Consulting contracts in progress.............. 20 428 442
Income tax receivable......................... -- 186 --
Prepaid expenses and other assets............. 311 438 1,397
------ ------- -------
Total current assets........................ 5,560 7,794 12,308
Property and equipment, net..................... 1,202 2,517 4,083
Intangible and other assets, net................ 81 2,645 3,431
------ ------- -------
Total assets................................ $6,843 $12,956 $19,822
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 150 $ 787 $ 2,248
Accrued payroll............................... 300 902 1,073
Other accrued expenses........................ 160 294 1,682
Notes payable................................. -- 1,500 5,887
Deferred revenue.............................. 238 199 774
Income taxes payable.......................... 383 -- 578
Deferred income taxes......................... 303 351 315
------ ------- -------
Total current liabilities................... 1,534 4,033 12,557
------ ------- -------
Deferred income taxes........................... 667 713 650
------ ------- -------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized.. -- -- --
Common stock, no par value; 10,000,000 shares
authorized................................... 419 1,943 3,224
Retained earnings............................. 4,028 6,042 3,180
Net unrealized holding gain on investments.... 195 225 209
Cumulative foreign currency translation
adjustment................................... -- -- 2
------ ------- -------
Total shareholders' equity.................. 4,642 8,210 6,615
------ ------- -------
Total liabilities and shareholders' equity.. $6,843 $12,956 $19,822
====== ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ARIS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Consulting............ $ 6,132 $ 9,725 $ 16,312 $ 2,543 $ 6,633
Training.............. 551 4,821 9,385 1,778 3,243
Software.............. 369 205 1,201 106 533
---------- ---------- ---------- ---------- ----------
Total revenue....... 7,052 14,751 26,898 4,427 10,409
---------- ---------- ---------- ---------- ----------
Cost of sales:
Consulting and
training............. 3,637 7,176 13,353 2,177 4,901
Software.............. 47 42 93 4 48
---------- ---------- ---------- ---------- ----------
Total cost of sales. 3,684 7,218 13,446 2,181 4,949
---------- ---------- ---------- ---------- ----------
Gross profit........ 3,368 7,533 13,452 2,246 5,460
Operating expenses:
Selling, general and
administrative....... 2,077 4,552 10,206 1,445 3,751
---------- ---------- ---------- ---------- ----------
Income from
operations......... 1,291 2,981 3,246 801 1,709
---------- ---------- ---------- ---------- ----------
Other income (expense):
Investment income..... 15 57 89 -- --
Interest income
(expense), net....... (4) 18 35 2 (42)
Other income
(expense)............ -- 40 (9) -- --
---------- ---------- ---------- ---------- ----------
11 115 115 2 (42)
---------- ---------- ---------- ---------- ----------
Income before income
tax................ 1,302 3,096 3,361 803 1,667
Income tax expense...... 476 1,086 1,347 297 623
---------- ---------- ---------- ---------- ----------
Net income.............. $ 826 $ 2,010 $ 2,014 $ 506 $ 1,044
========== ========== ========== ========== ==========
Net income per share.... $ 0.12 $ 0.24 $ 0.23 $ 0.06 $ 0.12
========== ========== ========== ========== ==========
Weighted average number
of common and common
equivalent shares
outstanding............ 6,675,570 8,487,011 8,581,572 8,573,546 8,512,537
========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ARIS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NET CUMULATIVE
UNREALIZED FOREIGN
HOLDING CURRENCY TOTAL
SHARES RETAINED GAIN ON TRANSLATION SHAREHOLDERS'
ISSUED AMOUNT EARNINGS INVESTMENTS ADJUSTMENT EQUITY
--------- ------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 4,200,000 $ 14 $ 1,192 $ 80 $ 1,286
Net income.............. 826 826
Unrealized holding gain
on investments......... 4 4
--------- ------ ------- ---- --- -------
Balance at December 31,
1994................... 4,200,000 14 2,018 84 2,116
Shares issued in
acquisition............ 1,400,000 263 263
Stock options exercised. 1,191,000 64 64
Tax benefit related to
stock options
exercised.............. 78 78
Net income.............. 2,010 2,010
Unrealized holding gain
on investments......... 111 111
--------- ------ ------- ---- --- -------
Balance at December 31,
1995................... 6,791,000 419 4,028 195 4,642
Shares issued in
acquisitions........... 790,900 1,614 1,614
Stock redemption........ (40,000) (100) (100)
Stock options exercised. 14,000 2 2
Tax benefit related to
stock options
exercised.............. 8 8
Net income.............. 2,014 2,014
Unrealized holding gain
on investments......... 30 30
--------- ------ ------- ---- --- -------
Balance at December 31,
1996................... 7,555,900 1,943 6,042 225 8,210
Shares issued in
acquisitions
(unaudited)............ 280,000 1,400 1,400
Stock redemption
(unaudited)............ (415,000) (121) (3,906) (4,027)
Stock options exercised
(unaudited)............ 3,000 2 2
Unrealized holding loss
on investments
(unaudited)............ (16) (16)
Foreign currency
translation adjustment
(unaudited)............ $ 2 2
Net income (unaudited).. 1,044 1,044
--------- ------ ------- ---- --- -------
Balance at March 31,
1997 (unaudited)....... 7,423,900 $3,224 $ 3,180 $209 $ 2 $ 6,615
========= ====== ======= ==== === =======
</TABLE>
Common stock shares reflect a two-for-one split effective August 29, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ARIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................. $ 826 $ 2,010 $ 2,014 $ 506 $ 1,044
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............. 69 201 661 76 320
(Gain) loss on sale of
property and equipment... -- (18) 6 -- --
Loss on sale of
investments.............. 9 -- -- -- --
Purchased research and
development.............. -- -- 307 -- --
Changes in assets and
liabilities net of
effects of acquisitions:
(Increase) decrease in
accounts receivable.... (1,147) (484) (1,548) 314 (2,303)
(Increase) decrease in
consulting contracts in
progress............... (69) (49) (408) (90) 12
(Increase) decrease in
income tax receivable.. -- -- (186) -- 186
(Increase) decrease in
prepaid expenses and
other assets .......... (35) (36) (21) 9 (561)
Increase (decrease) in
accounts payable....... 222 (178) 140 322 542
Increase in accrued
expenses............... 282 116 704 185 805
Increase (decrease) in
deferred revenue....... -- 124 (363) (8) 131
Increase (decrease) in
income taxes payable... 55 320 (383) (97) 464
Increase (decrease) in
deferred income taxes.. 265 196 (217) (38) (99)
------- ------- ------- ------ -------
Net cash provided by
operating activities... 477 2,202 706 1,179 541
------- ------- ------- ------ -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of investments
in marketable securities. (368) (381) (462) -- --
Sales of investments in
marketable securities.... 306 -- 362 (4) 8
Purchase of property and
equipment................ (220) (911) (1,196) (220) (475)
Acquisition of businesses,
net of cash acquired..... -- (112) (1,427) -- (93)
Proceeds from sale of
property and equipment... -- 27 43 -- --
------- ------- ------- ------ -------
Net cash used in
investing activities... (282) (1,377) (2,680) (224) (560)
------- ------- ------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Stock options exercised... -- 64 2 -- 2
Repurchase of common
stock.................... -- -- (100) -- (4,027)
Tax benefit related to
stock options exercised.. -- 78 8 --
Payments on notes payable. -- -- (500) -- (2,100)
Proceeds from notes
payable.................. -- -- 1,500 -- 6,450
------- ------- ------- ------ -------
Net cash provided by
financing activities... -- 142 910 -- 325
------- ------- ------- ------ -------
Net increase (decrease) in
cash and cash equivalents.. 195 967 (1,064) 955 306
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- -- 2
Cash and cash equivalents at
beginning of period........ 79 274 1,241 1,241 177
------- ------- ------- ------ -------
Cash and cash equivalents at
end of period.............. $ 274 $ 1,241 $ 177 $2,196 $ 485
======= ======= ======= ====== =======
</TABLE>
See Note 12 for supplemental cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
ARIS Corporation (the Company) provides information technology consulting
and training services with offices in Seattle and Bellevue, Washington;
Beaverton, Oregon; Denver, Colorado; Dallas, Texas; Fairfax, Virginia; Tampa,
Florida; and Redding, England. The Company also develops software programs
which it has licensed in the United States and Europe.
The Company has qualified as a minority-owned enterprise under the Section
8(a) Program administered by the U.S. Small Business Administration. To
maintain qualification in this program, the Company must meet certain on-going
financial and reporting requirements. Total Section 8(a) sales were $261,
$2,051 and $2,430 during 1994, 1995 and 1996, respectively. The Company ceased
to qualify under Section 8(a) subsequent to December 31, 1996.
The Company utilizes the significant accounting policies summarized below in
preparing its consolidated 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 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. The
Company held both available-for-sale and held-to-maturity marketable
securities at December 31, 1995. Held-to-maturity securities are recorded at
amortized cost in the accompanying consolidated financial statements. Cost of
securities sold is determined using the specific identification method.
F-7
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 ten years.
INTANGIBLE ASSETS
Intangible assets represent the cost of business acquisitions allocated to
capitalized software development costs, non-compete agreements and goodwill
which are amortized over approximately three years for capitalized software
development costs, approximately two years for non-compete agreements and
fifteen years for goodwill. Capitalized software development cost 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. Capitalized software
development costs are included in intangible and other assets in the
accompanying consolidated balance sheet.
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 is expensed immediately. Included in selling,
general and administrative expenses are research and development expenses of
none, none and $171, respectively for the three years ended December 31, 1996.
F-8
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
REVENUE RECOGNITION
Time and material consulting contracts
The Company recognizes revenue as services are rendered.
Fixed-price consulting contracts
Revenue from fixed-price contracts is 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. Consulting contracts in progress in the
accompanying consolidated financial statements represent the excess of revenue
earned on fixed-price consulting contracts over amounts billed to customers.
Education and training
Tuition revenue is recognized on the last day the class is held. Tuition
received prior to the classes being held is deferred and included as deferred
revenue in the accompanying consolidated balance sheet.
Software
The Company accounts for software revenue in accordance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
Software Revenue Recognition. Revenue earned under software license agreements
with end users is generally recognized when the software has been shipped,
collectibility is probable, and there are no significant obligations
remaining.
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
$38, $95 and $80 in 1994, 1995 and 1996, respectively.
F-9
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. The recorded
amount of long-term debt approximates fair value as the actual interest rates
approximate current competitive rates. 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 and net income per share. The
Company has elected to continue accounting for its employee stock-based
compensation under the provisions of Accounting Principles Board Opinion No.
25. The Company is required to implement Statement No. 123 for stock-based
awards to other than employees; however, the impact on the Company's financial
position at December 31, 1996 and results of operations for the year then
ended is immaterial.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods,
computed using the treasury stock method for stock options. In accordance with
Staff Accounting Bulletin Number 83 of the Securities and Exchange Commission,
stock options granted and stock issued at prices below the proposed initial
public offering price and issued during the twelve-month period immediately
preceding the initial public offering, have been considered outstanding for
all periods using the treasury stock method and the estimated initial public
offering price. Fully diluted earnings per share do not differ materially from
primary earnings per share.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of March 31, 1997 and for the quarters ended
March 31, 1997 and 1996 has not been audited. In the opinion of management,
the unaudited interim consolidated balance sheet, statements of income, of
changes in shareholders' equity and of cash flows include all adjustments
consisting solely of normal recurring adjustments necessary to present fairly
the Company's consolidated financial position, results of operations and cash
flows as of and for the periods indicated.
F-10
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. ACQUISITIONS
The Company has embarked upon an acquisition program which included the
acquisition of one company during 1995, and three companies during 1996. 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.
Legal, accounting and other direct costs of these acquisitions were
immaterial. 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 the purchase price paid is as follows:
<TABLE>
<S> <C>
Consideration:
Cash................................................................. $117
Value of common stock................................................ 263
----
$380
====
</TABLE>
The cost allocated to Clarity Inc.'s assets and liabilities at the date of
the acquisition, as determined in accordance with the purchase method of
accounting, is presented in the table below.
<TABLE>
<S> <C>
Cash............................................................... $ 5
Accounts receivable................................................ 300
Prepaid and other current assets................................... 76
Goodwill........................................................... 64
Property and equipment............................................. 185
Accounts payable and accrued liabilities........................... (250)
-----
$ 380
=====
</TABLE>
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if Clarity, Inc. had been acquired as of
January 1, 1994, including the impact of certain adjustments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenue...................................................... $9,383
Net income................................................... $1,088
Net income per share......................................... $ 0.14
</TABLE>
F-11
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the year 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.
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 Financials software in exchange for 40,000 shares of the Company's
common stock and cash.
A summary of the purchase price paid for the 1996 acquisitions is as
follows:
<TABLE>
<CAPTION>
SQLSOFT, SOFTEACH NOETIX
INC. CORP. CORP.
-------- -------- ------
<S> <C> <C> <C>
Consideration:
Cash.............................................. $ 750 $ 835
Note payable...................................... 500
Value of common stock............................. $1,317 152 145
Acquisition costs................................. 26
------ ------ ------
$1,317 $1,402 $1,006
====== ====== ======
</TABLE>
The cost preliminarily allocated to the assets and liabilities at the date
of the acquisition, as determined in accordance with the purchase method of
accounting for these acquisitions, is presented in the table below.
<TABLE>
<CAPTION>
SQLSOFT, SOFTEACH NOETIX
INC. CORP. CORP.
-------- -------- ------
<S> <C> <C> <C>
Cash............................................. $ 60 $ 124
Accounts receivable.............................. 537 73 $ 273
Prepaid and other current assets................. 73 35
Intangible assets:
Software technology--completed................. 384
Software technology--in progress............... 307
(Charged to research and development expense)
Non-compete agreements......................... 150
Goodwill....................................... 942 956 260
Property and equipment........................... 464 226 9
Accounts payable and accrued liabilities......... (759) (12) (377)
------ ------ ------
$1,317 $1,402 $1,006
====== ====== ======
</TABLE>
F-12
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if SQLSoft, Inc., SofTeach Corporation and
Noetix Corporation had been acquired as of the beginning of the periods
presented, including the impact of certain adjustments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Revenue................................................... $21,003 $30,306
Net income................................................ $ 2,220 $ 2,139
Net income per share...................................... $ 0.27 $ 0.25
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Computer equipment........................................... $1,125 $2,528
Furniture and fixtures....................................... 244 503
Software..................................................... 109 157
Other........................................................ 83 166
------ ------
1,561 3,354
Less: Accumulated depreciation............................... (359) (837)
------ ------
$1,202 $2,517
====== ======
</TABLE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
----- ------
<S> <C> <C>
Goodwill...................................................... $ 64 $2,221
Capitalized software costs.................................... 58 430
Non-compete agreements........................................ 150
Prepaids and other............................................ 274 404
----- ------
396 3,205
Less: Accumulated amortization................................ (4) (122)
----- ------
392 3,083
Less: Current portion......................................... (311) (438)
----- ------
Total noncurrent intangibles and other assets................. $ 81 $2,645
===== ======
</TABLE>
F-13
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INVESTMENTS
Investments in marketable securities at December 31, 1996 consist of equity
fund investments totaling $1,396. This investment has been classified as
available-for-sale and, accordingly, the excess of fair value over cost, net
of tax, of $225 has been included as a separate component of shareholders'
equity at December 31, 1996. Investments in marketable securities at December
31, 1995 consist of $362 classified as held-to-maturity and $888 classified as
available-for-sale securities. The held-to-maturity securities are carried at
amortized cost and the excess of fair value over cost, net of tax, of $195
related to the available-for-sale securities has been included as a separate
component of shareholders' equity at December 31, 1995.
6. MAJOR CUSTOMERS
During 1994, 1995 and 1996, the Company had consulting sales to one customer
that aggregated 20%, 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.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $135 $ 763 $1,429
State.................................................. 14 40 110
---- ------ ------
149 803 1,539
---- ------ ------
Deferred:
Federal................................................ 305 264 (204)
State.................................................. 22 19 12
---- ------ ------
327 283 (192)
---- ------ ------
Total tax expense........................................ $476 $1,086 $1,347
==== ====== ======
</TABLE>
The principal reasons for the variation from the customary relationship
between income taxes at the statutory federal rate and that shown in the
consolidated statement of income are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate....................... $ 443 $1,053 $1,143
Goodwill................................................ -- 1 17
State income taxes, net of federal income tax benefit... 24 39 80
Purchased research and development...................... -- -- 104
Other................................................... 9 (7) 3
----- ------ ------
$ 476 $1,086 $1,347
===== ====== ======
</TABLE>
F-14
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1995 1996
---- ------
<S> <C> <C>
Adjustments to cash basis accounting for tax purposes........... $782 $ 672
Depreciation and amortization................................... 81 333
Unrealized gain on marketable securities........................ 107 124
Other........................................................... -- 1
---- ------
Gross deferred tax liabilities................................ 970 1,130
---- ------
Bad debt allowance.............................................. -- 8
Accrued vacation and bonuses.................................... -- 39
Research and development credit................................. -- 19
---- ------
Gross deferred tax assets..................................... -- 66
---- ------
$970 $1,064
==== ======
</TABLE>
8. DEBT
At December 31, 1996 the Company had borrowings of $1,000 outstanding on a
$3,000 line of credit. Interest on this line bears interest at the prime rate
(8.25% at December 31, 1996). This revolving line of credit was replaced on
March 14, 1997 with a $8,000 line of credit which is collateralized by all of
the Company's assets. Both the $3,000 and $8,000 lines of credit include
various affirmative and negative covenants which require, among other things,
maintenance of a certain level of working capital and a certain current ratio.
(See Note 14).
The Company has a note payable of $500 in connection with the acquisition of
SofTeach Corporation (Note 2). The note bears interest at 6% and matures in
installments of $250 on April 1, 1997 and July 1, 1997. This note is secured
by the assets acquired in the SofTeach acquisition.
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:
<TABLE>
<S> <C>
1997.................................................................. $1,152
1998.................................................................. 806
1999.................................................................. 625
2000.................................................................. 546
2001.................................................................. 213
Thereafter............................................................ --
------
$3,342
======
</TABLE>
Rent expense for 1994, 1995 and 1996 was $65, $253 and $702, respectively.
F-15
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. STOCK OPTIONS
Prior to January 1995, the Company from time to time granted non-qualified
stock options to key employees. These grants were not made pursuant to any
formal policy or 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 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, less that 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 of the Company's non-employee directors. 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.
F-16
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the activity for qualified and non-qualified stock options
granted prior to 1995 and under the 1995 Stock Option Plan is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
------------------- --------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 946,000 $0.03 1,205,000 $0.05 134,000 $0.30
Granted................. 259,000 0.13 120,000 0.34 262,000 2.79
Exercised............... -- -- (1,191,000) 0.05 (14,000) 0.09
Forfeited............... -- -- -- (28,300) 0.78
Outstanding at end of
year................... 1,205,000 0.05 134,000 0.30 353,700 2.12
Options exercisable at
year-end............... 939,000 0.04 111,000 0.29 117,598 0.67
Weighted-average fair
value of options
granted during the
year................... -- 0.08 0.50
</TABLE>
The following table summarizes information about stock options outstanding
under the Plans at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.19-$9 353,700 6.1 years $2.12 117,598 $0.67
</TABLE>
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 would
have decreased by approximately $2 and $21, respectively, in 1995 and 1996
(unaudited). 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, risk free interest rate ranging from
5.36% to 7.05%, and an expected life of 4.75 years.
11. PROFIT SHARING PLAN
The Company maintains a qualified defined contribution profit sharing 401(k)
plan which covers full time employees with one year of service. Contributions
to the plan are discretionary. There were no employer contributions to the
plan for 1994, 1995 or 1996.
F-17
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING
AND FINANCING ACTIVITIES
The Company paid interest of $4, $3 and $34 during 1994, 1995 and 1996,
respectively. The Company paid $153, $423 and $2,123 in income taxes during
1994, 1995 and 1996, respectively.
As more fully described in Note 2, the Company acquired Clarity, Inc. in
1995 in exchange for shares of its common stock and cash and acquired SQLSoft,
Inc., SofTeach Corporation and Noetix Corporation in 1996 in exchange for a
combination of stock, cash and notes payable.
13. OPERATING BUSINESS GROUPS
The Company is engaged in information technology consulting and training
services 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 have been added or deducted: general
corporate expenses, interest 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.
Summarized financial information by business group for 1994, 1995 and 1996
is as follows:
<TABLE>
<CAPTION>
CONSULTING TRAINING SOFTWARE CORPORATE TOTAL
---------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
1994:
Revenue...................... $6,132 $ 551 $369 $ 7,052
Operating profit............. 2,138 79 281 $(1,207) 1,291
Identifiable assets.......... 2,246 20 14 1,040 3,320
Depreciation and
amortization................ 49 4 3 13 69
Capital expenditures......... 160 11 10 39 220
1995:
Revenue...................... $9,725 $4,821 $205 $14,751
Operating profit............. 3,645 1,161 (22) $(1,803) 2,981
Identifiable assets.......... 2,740 1,189 16 2,898 6,843
Depreciation and
amortization................ 58 127 4 12 201
Capital expenditures......... 201 500 6 204 911
</TABLE>
<TABLE>
<CAPTION>
CONSULTING TRAINING SOFTWARE CORPORATE TOTAL
---------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
1996:
Revenue...................... $16,312 $9,385 $1,201 $26,898
Operating profit............. 3,884 1,381 (325) $(1,694) 3,246
Identifiable assets.......... 5,437 3,880 1,659 1,980 12,956
Depreciation and
amortization................ 20 439 68 128 655
Capital expenditures......... 28 1,001 31 136 1,196
</TABLE>
F-18
<PAGE>
ARIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. SUBSEQUENT EVENTS
In February 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. The
shareholders of Oxford exchanged their shares for 280,000 shares of the
Company's common stock. The acquisition will be accounted for by the purchase
method. Accordingly, the results of operations of Oxford will be included with
the results of operations of the Company for periods subsequent to the date of
acquisition. In connection with the acquisition of Oxford, 207,891 stock
options were granted to certain key employees of Oxford. Terms of the option
agreements include an exercise price of $9.40 and vesting over four years.
Oxford had revenues of (Pounds)4,730 (approximately $7,384)(unaudited) and
net income of (Pounds)109 (approximately $170)(unaudited) for the year ended
December 31, 1996.
The unaudited pro forma combined results of operations of the Company and
Oxford for 1996 are as follows:
<TABLE>
<S> <C>
Revenue.............................................................. $34,282
Net income........................................................... $ 2,083
Net income per share................................................. $ 0.25
</TABLE>
As described in Note 8, the Company entered into an $8,000 line of credit
agreement on March 14, 1997. The amounts outstanding under the Company's
existing line of credit were refinanced under the new line of credit.
Additionally, the Company used $3,900 of the line of credit to repurchase
415,000 shares of the Company's common stock at $8.50 and $9.75 per share from
certain shareholders of the Company.
In January and February 1997, 572,200 stock options were granted to certain
employees of the Company with terms that include an exercise price of $5.00
per share and vesting over five years.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
SofTeach Corporation
In our opinion, the accompanying statements of income, of changes in
shareholders' equity and of cash flows present fairly, in all material
respects, the results of operations and cash flows of SofTeach Corporation for
the nine months ended September 30, 1996, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
March 14, 1997
F-20
<PAGE>
SOFTEACH CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
Training revenue.................................................. $1,507,717
Cost of training.................................................. 655,319
----------
Gross profit.................................................. 852,398
Selling, general and administrative expense....................... 504,707
----------
Income from operations............................................ 347,691
Interest income................................................... 9,021
Other income...................................................... 2,683
----------
Net income........................................................ $ 359,395
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-21
<PAGE>
SOFTEACH CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------
ADDITIONAL TOTAL
SHARES PAID-IN RETAINED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995..................... 62 $ 6 $9,770 $480,830 $490,606
Net income................ 359,395 359,395
Shareholder distributions. (575,394) (575,394)
--- --- ------ -------- --------
Balance at September 30,
1996..................... 62 $ 6 $9,770 $264,831 $274,607
=== === ====== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-22
<PAGE>
SOFTEACH CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 359,395
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 41,240
Changes in assets and liabilities:
Increase in accounts receivable............................. (8,234)
Increase in inventories..................................... (10,409)
Increase in prepaid expenses and other assets............... (7,556)
Decrease in accounts payable................................ (18,268)
Increase in unearned revenue................................ 7,991
---------
Net cash provided by operating activities..................... 364,159
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................ (6,216)
---------
Net cash used in investing activities......................... (6,216)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder distributions..................................... (575,394)
---------
Net cash used in financing activities......................... (575,394)
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS....................... (217,451)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 340,006
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 122,555
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-23
<PAGE>
SOFTEACH CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
SofTeach Corporation (the "Company") provides information technology
training to clients throughout Denver and the Colorado front range.
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.
PROPERTY AND EQUIPMENT
Expenditures for maintenance and repairs are charged to expense 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 five years.
REVENUE RECOGNITION
Tuition revenue is recognized on the last day the class is held. Tuition
received prior to the classes being held is deferred.
INCOME TAXES
The Company has elected to be taxed under the provisions of the "S"
corporation section of the Internal Revenue Code. Under those provisions, the
Company does not pay corporate income taxes, nor does it receive the benefit
of net operating loss carryforwards or carrybacks. Instead, the shareholders
are liable for individual income taxes on their respective shares of the
Company's taxable income or include their respective shares of the Company's
taxable income or include their respective shares of the Company's net
operating loss in their individual income tax returns.
ADVERTISING COSTS
Advertising costs are expensed as incurred and included in selling, general
and administrative expense. Advertising expenses amounted to $40,739 for the
nine months ended September 30, 1996.
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
2. CONCENTRATION OF CREDIT RISK
The Company provides instructor-led informational technology training
specializing in Microsoft technologies. During the nine month period ended
September 30, 1996, the Company had sales to two major customers of
approximately $180,000 and $160,000, respectively, which individually exceed
10% of total sales. Accounts receivable from these customers was 23% of total
accounts receivable at September 30, 1996. The overall credit SofTeach
Corporation risk associated with the Company's trade receivables is minimal
due to the large number of customers in differing industries. Historically,
the Company has not experienced significant losses on trade receivables.
3. LEASE COMMITMENTS
The Company rents all its office space and computer training equipment under
non-cancelable operating leases. All lease agreements are guaranteed by the
shareholders of the Company. Rent expense for the nine months ended September
30, 1996 was $67,010.
4. EMPLOYEE RETIREMENT PLANS
Employees of the Company participate in a savings plan. All employees are
eligible to participate in the plan after six months of employment and
attaining the age of 21. SofTeach contributes 3% of the average employee's
annual salary in four equal quarterly distributions. Employees vest
immediately in employer contributions. Employees may contribute up to 15% of
their salary before income taxes. During the year, SofTeach recognized
expenses of and contributed cash to the savings plan in the amount of $10,507.
5. SUBSEQUENT EVENT
Effective October 1, 1996, SofTeach Corporation sold substantially all of
its assets and liabilities to ARIS Corporation under an asset purchase
agreement and liquidated the corporation. Under the terms of the agreement,
SofTeach's stockholders received approximately $1.25 million in cash and notes
from ARIS plus ARIS common stock valued at $152,000. The notes from ARIS are
secured by the SofTeach assets sold to ARIS.
F-25
<PAGE>
ARIS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheet of ARIS Corporation at
December 31, 1996 gives effect to the acquisition of Oxford Computer Group
Limited as if it was consummated on December 31, 1996. The unaudited pro forma
combined statement of income of ARIS Corporation for the year ended December
31, 1996 gives effect to the acquisition of SQLSoft, Inc., SofTeach
Corporation, Noetix Corporation and Oxford Computer Group Limited as if such
businesses were acquired on January 1, 1996. The unaudited pro forma combined
statement of income of ARIS Corporation for the quarter ended March 31, 1997
gives effect to the acquisition of Oxford Consulting Group Limited as if such
business was acquired on January 1, 1997.
The unaudited pro forma combined balance sheet and statement of income are
presented for informational purposes only and do not purport to represent what
the Company's financial position and results of operation for the year ended
December 31, 1996 and the results of operations for the quarter ended March
31, 1997 would actually have been had the acquisitions, in fact, occurred on
January 1, 1996, or the Company's results of operations for any future period.
The unaudited pro forma combined balance sheet and statement of income should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto included elsewhere in this Prospectus and the information set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
F-26
<PAGE>
ARIS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
FORMA
ARIS OXFORD ADJUSTMENTS COMBINED
------- ------ ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 177 $ 1 $ 178
Investments in marketable securities....... 1,396 1,396
Accounts receivable........................ 5,169 1,448 6,617
Other current assets....................... 1,052 445 1,497
Property and equipment, net................ 2,517 1,224 3,741
Intangible and other assets................ 2,645 32 $ 970 (a) 3,647
------- ------ ------ -------
Total assets........................... $12,956 $3,150 $ 970 $17,076
======= ====== ====== =======
Current liabilities........................ $ 4,033 $2,613 $ 6,646
Long-term debt and other................... 713 107 820
Common stock............................... 1,943 $1,400 (a) 3,343
Retained earnings.......................... 6,042 394 (394)(b) 6,042
Unrealized holding gain.................... 225 225
Currency translation adjustment............ 36 (36)(b) --
------- ------ ------ -------
Total liabilities and equity........... $12,956 $3,150 $ 970 $17,076
======= ====== ====== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
F-27
<PAGE>
ARIS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL TOTAL
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
1996 1997 PRO FORMA
ARIS SOFTEACH ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
--------- -------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Consulting............. $ 16,312 $1,933 $ 18,245
Training............... 9,385 $1,508 1,079 5,451 17,423
Software............... 1,201 821 2,022
--------- ------ ----- ------ ---------
Total revenue........ 26,898 1,508 1,900 7,384 37,690
--------- ------ ----- ------ ---------
Cost of sales
Consulting and
training.............. 13,353 655 273 3,277 17,558
Software............... 93 434 527
--------- ------ ----- ------ ---------
Total cost of sales.. 13,446 655 707 3,277 18,085
--------- ------ ----- ------ ---------
Gross profit ........ 13,452 853 1,193 4,107 19,605
Selling, general and
administrative......... 10,206 505 1,025 3,837 $317(c) 15,890
--------- ------ ----- ------ ----- ---------
Income from operations.. 3,246 348 168 270 (317) 3,715
Other income (expense) 115 11 7 (46) (23)(d) 64
--------- ------ ----- ------ ----- ---------
Income before income
tax.................... 3,361 359 175 224 (340) 3,779
Income tax expense...... 1,347 14 54 156 (e) 1,571
--------- ------ ----- ------ ----- ---------
Net income.............. $ 2,014 $ 359 $ 161 $ 170 $(496) $ 2,208
========= ====== ===== ====== ===== =========
Net income per share.... $ 0.23 $ 0.26
========= =========
Weighted average number
of common and common
equivalent shares
outstanding............ 8,581,572 8,581,572
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
F-28
<PAGE>
ARIS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
QUARTER ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
INDIVIDUALLY
INSIGNIFICANT
1997 PRO FORMA
ARIS ACQUISITIONS ADJUSTMENTS COMBINED
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue
Consulting.................... $ 6,633 $ 6,633
Education..................... 3,243 $1,586 4,829
Software...................... 533 533
--------- ------ ---------
10,409 1,586 11,995
Cost of sales
Consulting and training....... 4,901 590 5,491
Software...................... 48 -- 48
--------- ------ ---------
Total cost of sales.......... 4,949 590 5,539
--------- ------ ---------
Gross profit................. 5,460 996 6,456
Selling, general and
administrative................ 3,751 857 $ 11(c) 4,619
--------- ------ ---- ---------
Income from operations......... 1,709 139 (11) 1,837
Other income (expense)......... (42) (6) (48)
--------- ------ ---- ---------
Income before income tax...... 1,667 133 (11) 1,789
Income tax expense............. 623 49 21(e) 693
--------- ------ ---- ---------
Net income.................... $ 1,044 84 $(32) $ 1,096
========= ====== ==== =========
Net income per share........... $ 0.12 $ 0.13
========= =========
Weighted average number of
common and common equivalent
shares outstanding............ 8,512,537 8,512,537
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
F-29
<PAGE>
ARIS CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET AND STATEMENT OF INCOME
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The pro forma combined balance sheet gives effect to the acquisition of
Oxford Computer Group Limited as if it was consummated on December 31, 1996.
The pro forma adjustments are based on consideration exchanged, including the
estimated fair value of assets acquired, liabilities assumed and common stock
issued. The actual adjustments, which will be based on valuations of fair
value as of the date of acquisition, may differ from that made herein.
The pro forma combined statement of income for the year ended December 31,
1996 gives effect to the acquisition of (1) SofTeach Corporation, (2) other
individually insignificant 1996 acquisitions (Noetix Corporation and SQLSoft,
Inc.) and (3) other individually insignificant 1997 acquisitions (Oxford
Computer Group Limited), as if these entities had been acquired as of January
1, 1996. The results of operations of SofTeach Corporation, Noetix Corporation
and SQLSoft, Inc. have been included in the consolidated results of operations
of ARIS Corporation as of the dates the acquisitions were consummated which
are October 1, 1996, May 1, 1996 and October 1, 1996, respectively. As Oxford
Computer Group Limited was acquired subsequent to December 31, 1996, the
consolidated results of operations of ARIS for the year ended December 31,
1996 do not include any amounts related to Oxford Computer Group Limited.
Accordingly, the SofTeach, Oxford Computer Group Limited, Noetix Corporation
and SQLSoft, Inc. results of operations included in the pro forma statement of
income for the year ended December 31, 1996 reflect the results of operations
for the period January 1, 1996 to September 30, 1996, the year ended December
31, 1996, the period January 1, 1996 to September 30, 1996 and the period
January 1, 1996 to April 30, 1996, respectively.
The pro forma combined statement of income for the quarter ended March 31,
1997 gives effect to the acquisition of Oxford Computer Group Limited as if it
was consumated on January 1, 1997. The acquisition of Oxford Computer Group
Limited was completed on February 28, 1997 and, therefore, the results of
operations have been included in the consolidated results of ARIS Corporation
from that date. Accordingly, Oxford Computer Group Limited results of
operations included in the pro forma statement of income for the quarter ended
March 31, 1997 are for the period from January 1, 1997 to February 28, 1997.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash, notes payable and common stock
consideration exchanged by the Company for the fair value of the assets
acquired and liabilities assumed.
2. PRO FORMA ADJUSTMENTS
(a) To record the February 1997 acquisition of Oxford Computer Group as
follows:
<TABLE>
<S> <C>
Purchase price................................................ $1,400
Net assets acquired........................................... (430)
------
Purchase price allocated to goodwill.......................... $ 970
======
</TABLE>
F-30
<PAGE>
ARIS CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET AND STATEMENT OF INCOME
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The purchase price of Oxford Computer Group was 280,000 shares of the
Company's common stock which was valued at $5.00 per share which was the fair
value of the Company's common stock on the date the acquisition was announced
publicly.
(b) To eliminate the equity of the acquired business.
(c) To record amortization of goodwill, non-compete agreement and
capitalized software development costs for periods prior to the acquisition
dates of the entities acquired. The purchased research and development cost of
$307 recorded in the Noetix Corporation acquisition was charged to research
and development expense in the 1996 consolidated statement of income of ARIS
Corporation. Goodwill is amortized over fifteen years, non-compete agreement
over approximately two years and capitalized software development costs over
approximately three years. Capitalized software development costs are
amortized 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. The straight-line method is used for other
intangible assets.
(d) To record interest expense on note payable issued as consideration in
acquisition of SofTeach Corporation.
(e) To record income tax expense on combined pro forma income before income
tax adjusted for nondeductible goodwill amortization of $148 and $11 based on
the effective tax rate of ARIS Corporation for the year ended December 31,
1996 and the quarter ended March 31, 1997 of 40% and 37%, respectively.
F-31
<PAGE>
[MAP SHOWING LOCATIONS OF CONSULTING AND TRAINING OFFICES.]
[TRADEMARKS AND SERVICE MARKS OF THE COMPANY]
The ARIS name and logo are service marks, and the Noetix, NoetixViews and
ARIS DFRAG names are trademarks of the Company. This Prospectus also includes
tradenames, trademarks and service marks of other companies.
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 1
The Company............................................................. 2
Risk Factors............................................................ 3
Use of Proceeds......................................................... 10
Dividend Policy......................................................... 10
Capitalization.......................................................... 11
Dilution................................................................ 12
Selected Consolidated and Pro Forma Combined Financial Data............. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 15
Business................................................................ 26
Management.............................................................. 39
Certain Transactions.................................................... 44
Principal and Selling Shareholders...................................... 45
Description of Capital Stock............................................ 46
Shares Eligible for Future Sale......................................... 49
Underwriting............................................................ 50
Legal Matters........................................................... 52
Experts................................................................. 52
Additional Information.................................................. 52
Index to Financial Statements........................................... F-1
</TABLE>
UNTIL , 1997, (25 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
[LOGO OF ARIS(SM)]
2,020,800 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
PROSPECTUS
, 1997
