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