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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22649
ARIS CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1497147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2229 112TH AVENUE NE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip code)
(425) 372-2747
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Class on which registered
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Common Stock Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 10, 2000 was approximately $107,435,440.
The number of shares of the registrant's Common Stock outstanding at
March 10, 2000 was 12,839,697.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders are incorporated
by reference in Part I and Part II hereof.
The Company's definitive proxy statement for its annual meeting of
shareholders on April 27, 2000, 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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PART I
ITEM 1. BUSINESS
Aris Corporation (which may be referred to as "Aris" or the "Company")
was incorporated in Washington in 1990. Aris provides an integrated information
technology ("IT") solution consisting of consulting and training services
primarily focused on Oracle, Microsoft, PeopleSoft, Sun and Lotus technologies.
The Company also develops, markets and supports proprietary software products
through its Noetix branded packaged applications.
The Company believes that its ability to provide clients with an
integrated IT solution, coupled with its focus on leading-edge technologies,
provides it with a unique competitive advantage.
This commentary should be read in conjunction with the following
documents for a full understanding of the Company's financial condition and
results of operations:
- The Company's Annual Report on Form 10-K for the year ended December
31, 1998.
- The Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1999, June 30, 1999 and September 30, 1999.
- The Registration Statement on Form S-4 filed August 5, 1999, as
amended, in connection with the Company's merger with fine.com
International Corp. ("fine.com") through Aris Interactive, Inc.,
including the Consolidated Financial Statements and Notes to
Consolidated Financial Statements, pages F-1 to F-50.
All statements, trend analysis and other information contained herein
relative to markets for the Company's services and products and trends in
revenue, gross margins, expenses, results of operations and other financial
information, as well as other statements including words such as "seek,"
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business, market and economic risks,
and the Company's actual results of operations may differ materially from those
contained in the forward-looking statements.
INDUSTRY BACKGROUND
Business 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. An enterprise's ability to evaluate, integrate,
deploy and leverage IT systems is a critical competitive issue. Business
- -to-business e-commerce will soon account for 7% of total global according to a
report published by the research firm Gartner Group (IT) ("Gartner"). The
business of establishing e-commerce capabilities - for startup companies and
traditional brick-and-mortar companies -
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will itself be a driving factor in the growth of business-to-business
e-commerce, what Gartner calls "e-market maker activity" and will make up 37% of
the business-to business e-commerce market, worth $2.71 trillion, by the year
2004.
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, financial and other business
systems, require cooperation and coordination of virtually every department
within an enterprise. Enterprises must also ensure that their IT employees
possess the skills to operate, maintain and maximize performance of their
increasingly complex information systems. Additional employee training is also
required each time an enterprise implements a new technology or updates its
existing technology. In many large enterprises, IT training is virtually
continuous. According to an article published by the U.S. Department of
Commerce, "by 2006, 50% of all American workers will be employed in IT positions
or within industries that intensively utilize information technology, products
and services."
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. Most enterprises do not have
the infrastructure to provide the necessary IT training internally. Confronted
with these challenges, many enterprises turn to and rely upon independent IT
service providers, such as Aris, for their IT consulting and training
requirements.
Early in 1999, there was a dramatic shift in IT services toward the
eBusiness services market of Web-enabled solutions. eBusiness means integrating
fundamental business systems with Web technology. It means conducting business
over intranets, extranets, and the Internet. The global and instantaneous reach
of the Internet is changing the way that all companies consider their IT needs.
The Web enables fundamental changes in the reach, cost and speed of basic
functions such as sales, procurement, supply chains, and distribution, while
introducing new critical success factors.
Aris believes the legacy business of developing and implementing
enterprise-level back-end IT systems, combined with fine.com's proven front-end
development expertise, gives the company a balance of skills that enables it to
meet the entire spectrum of its clients' eBusiness needs.
STRATEGY
The Company's objective is to be a leading provider of integrated IT and
electronic commerce solutions by pursuing the following strategies:
Provide eBusiness Solutions to Clients that Add to Their Internal
Enterprise Information Systems the Ability to Collaborate and Share Information
With Customers and Other Businesses and to Engage in Internet Commerce. Aris
believes it can offer its clients high value, integrated solutions that begin
with the implementation of the clients' enterprise
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information technology and relational database systems and extend those
management tools through the use of Internet applications and electronic
commerce solutions.
Focus on Leading-Edge Technologies and Technology Trends. The Company
intends to maintain its alignment with leading-edge technology vendors such as
Oracle, Microsoft, Lotus, PeopleSoft and Sun and to aggressively pursue
relationships with leading vendors of Internet-based and electronic commerce
solutions. Aris may change or expand the range of vendors on which it focuses
over time in order to maintain alignment with leading-edge, emerging
technologies. The Company also continually evaluates technology trends, such as
new products and product releases, new training delivery mechanisms, and the
evolving technology needs of its clients. Vendor-authorized, instructor-led open
enrollment training continues to be an important aspect of the Company's
education business. However, the Company intends to focus on more
consulting-oriented education services and customized training for larger
clients with increasing emphasis on Internet- and intranet-based training,
including audio and video streaming and other "webcasting" technologies. The
Company has also developed a proprietary performance improvement consulting
methodology that assesses the client's training requirements and current skill
levels, develops a curriculum specifically tailored to such requirements and
skills, and evaluates performance to ensure that the client's training
objectives are met. By focusing on leading-edge technologies and trends, the
Company believes it will be able to continue to offer specialized and
value-added services to its clients, at higher margins.
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 opportunity to
work with leading-edge technologies; (iii) attractive compensation and
equity-based plans that align employees' interests and goals with those of the
Company; (iv) a stimulating, flexible, entrepreneurial work environment; and (v)
the opportunity to train on the latest technologies.
Maintain High Levels of Client Satisfaction. Aris believes that
satisfying client expectations is critical to expanding relationships with
existing clients and receiving positive references for future sales. Aris uses a
standard methodology and quality assurance program to provide for a consistent
high level of client satisfaction. Aris views its ability to use a client as a
reference for other potential clients as a critical measure of the success of
any project.
Strategic Growth. Aris intends to continue to expand its operations by
enhancing the capabilities and staffing of its existing offices. The company
intends to focus its consulting business on offering eBusiness solutions that
add to internal enterprise information systems the ability to communicate and
collaborate with customers, suppliers and business partners over the Internet
and to engage in electronic commerce. Aris intends to evaluate each of its
service and product offerings, including the continued role of its training and
software businesses, to determine whether and how each can contribute to
providing an integrated enterprise information and electronic commerce solutions
for clients. The Company made
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several internal reorganizations as well as the strategic acquisition of a
complementary Web development company during 1999:
- In July, Aris appointed Hugh Simpson-Wells as Vice President of
Worldwide Education to manage and grow its global training
operations, aligning its training divisions worldwide under common
management.
- Also in July, Kendall Kunz assumed responsibility for worldwide
consulting operations.
- On August 31, 1999, Aris completed its acquisition of fine.com
International Corp., a Web development company located in Seattle,
Washington, in exchange for 1,470,574 shares of the Company's common
stock, plus approximately $3,003,000 cash. The transaction was
accounted for as a purchase.
- In the third quarter of 1999, Aris closed three unprofitable
training centers located in New York, Minneapolis and Chicago
allowing the Company to redeploy capital and management to its
remaining centers.
- In the fourth quarter of 1999, the Company reorganized its US
consulting operations around its custom eBusiness and enterprise
resource planning ("ERP") practices.
Aris may continue to pursue additional strategic acquisitions in order
to acquire expertise in new technologies, expand its client base, gain access to
qualified IT professionals and enter new geographic markets.
ARIS CONSULTING
Aris provides IT consulting services primarily to clients that require
assistance planning, designing, developing, testing and deploying their specific
technology requirements and infrastructure. Aris currently focuses on three core
consulting competencies: eBusiness solutions and custom application development,
packaged application implementation, and systems architecture planning and
deployment.
eBusiness Solutions and Custom Application Development. Aris consulting
designs, develops and implements customized eBusiness software applications that
allow its clients to gather and communicate business information through the
Internet integrating an organization's overall marketing, commerce and business
strategy.
Packaged Application Implementation. Aris consulting focuses on the
packaged ERP market, particularly the implementation of Oracle database
management, Oracle packaged applications and PeopleSoft human resource
applications.
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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.
Consultant utilization, billing rates and headcount are reviewed
regularly by management to monitor whether projects are being completed in
accordance with client expectations and contractual obligations. Most projects
are staffed by Company employees, although independent contractors may also be
used depending on project requirements. As projects are completed, or as new
consultants are hired, there may be periods when individual consultants or
project managers are not assigned to active client projects. During these
periods of non-assignment, consultants and project managers may receive training
on new technologies, help develop proprietary consulting methodologies and
tools, or assist in developing the Company's internal data systems.
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, and Internet and networking
technologies. Aris provides instructor-led training through regularly scheduled
open enrollment classes, private classes (using both standard and customized
content), and Internet- and intranet-based training. Aris also provides other
training related services such as IT skills assessment, "train the trainer"
programs, curriculum development and education consulting services.
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' vendor
authorized training designations.
Aris uses both vendor-authorized 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 his or her training.
These evaluations are used by the Company to modify course offerings and
training techniques in order to improve instructor performance.
The Company offers Performance Improvement Consulting, a comprehensive
training solution marketed to corporate clients. Performance Improvement
Consulting involves assessing a client's training requirements and current skill
levels of its IT staff, developing a
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customized training curriculum, delivering the training to the Company's IT
staff, and testing the IT staff to ensure that the training meets the client's
previously defined training goals. The Company believes that these customized,
value-added training services should increase the profitability of its training
operations.
During the year, the Company formed a separate group to develop and
deploy real-time, interactive training courses over the Internet. This
technology allows Internet-based training using audio and video streaming and
other "Webcasting" technologies. In 1999, Aris offered a variety of classes
featuring Microsoft and Oracle training.
In the third quarter of 1999, in a continuing effort to improve the
profitability of its training division, Aris closed three unprofitable training
centers located in New York, Minneapolis and Chicago. The costs associated with
the closing of these centers is approximately $6.6 million, including payments
of $1.4 million for employee severance expenses, lease terminations and
termination of contract obligations, $4.5 million for reductions in carrying
value of assets, representing a write-off of approximately $3.5 million of
goodwill and $1 million of leasehold improvements, furniture and equipment and
$700,000 of other expenses. The cost of closure was charged to expense in the
quarter ended September 30, 1999.
ARIS SOFTWARE
Aris Software develops, distributes, markets and sells the Company's
proprietary software products. Currently, the Company markets and sells the
following software products:
- NOETIX WEB QUERY lets users retrieve critical business information
from all of a company's databases from anywhere at anytime. All a
user needs is a browser and Internet connectivity. Noetix Web
Query's powerful XML features deliver ad hoc query information to
in-house employees, off-site employees, business partners, or
Internet customers with point-and-click simplicity. Within the
enterprise, Noetix Web Query completely manages the complexities and
security of multiple server sources, presenting a single view of
corporate information to users.
- 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. Currently, there are NoetixViews
products for each of the following Oracle Applications:
- NoetixViews Accounts Payable - NoetixViews Accounts Receivable
- NoetixViews General Ledger - NoetixViews Fixed Assets
- NoetixViews Inventory - NoetixViews Order Entry
- NoetixViews Purchasing - NoetixViews Bills of Material
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- NoetixViews Costing - NoetixViews Work in Progress
- NoetixViews Scheduling - NoetixViews Project Costing
- NoetixViews Human Resources - NoetixDW for Financials
- NoetixViews Project Billing - NoetixViews Application Object
Library
NoetixDW for Financials greatly simplifies the task of setting up and
running an Oracle Financials data warehouse. The NoetixDW products automatically
create key data warehouse structures that take much of the costly consulting
work out of typical corporate data warehouse projects.
- TAMS and TAMS/O, which are developed, marketed and sold through the
Company's ERP group, are systems which collect and organize each
employee's "time-worked" in order to produce an accurate paycheck,
while providing management with information to better utilize human
resources.
Oracle has released a product having some of the same features and
functionality of NoetixViews, and has announced that it intends to bundle this
product, without additional charge, with its release of Oracle 11i. Sales of
NoetixViews account for a material portion of Aris' software revenues. Oracle's
release of this competing product and its marketing and bundling strategy could
have a material adverse effect on sales of NoetixViews and the results of
operations of Aris.
Management believes its various software products enhance the Company's
consulting services. Through its consulting and training services, Aris expects
to continue to identify development opportunities for new software products.
RELATIONSHIPS WITH KEY VENDORS
The Company has developed strategic relationships with key vendors of
software. These strategic relationships may allow the Company to gain access to
pre-release versions of software and the software vendor's marketing channels,
as well as to receive discounts on software. Certain of these software vendors
also compete with the Company in providing IT consulting and training services
and software products. 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 that might adversely affect the Company's
ability to compete successfully with its competitors.
SALES AND MARKETING
The Company's consulting and education divisions have separate sales
forces. The Company's consulting sales operations are headed by a Vice President
of Consulting Sales who reports to the Senior Vice President of Worldwide
Consulting. The Education sales force includes account executives and account
managers focused on selling larger, private training engagements and a
telemarketing group to direct market the Company's public class offerings. Aris
sells its software products directly through account executives and internal
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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.
Aris significantly increased its marketing activities during the latter
part of 1999 to increase awareness of the Aris brand. 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 also integral parts of the Company's 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, provides it with a unique competitive
advantage. 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 multinational accounting firms, the
consulting divisions of software vendors such as Oracle, Microsoft, Lotus and
PeopleSoft, 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, the training
divisions and authorized training channels of software vendors such as Oracle,
Sun, and Microsoft, and independent international, national and regional
companies with IT training operations.
Aris' decision to focus on eBusiness consulting solutions that integrate
enterprise IT systems with Internet-based and electronic commerce applications
may result in competition with companies that specialize in Internet and
electronic commerce solutions as well as many of its existing competitors. The
market for these solutions is intensely competitive, and characterized by rapid
advances in technology and changing client requirements.
Aris software products compete with software products distributed by
other companies. New competitive products may be developed by others that could
have a material adverse effect on sales of NoetixViews.
INTELLECTUAL PROPERTY
The Company uses certain proprietary consulting and training
methodologies, courseware, software applications and products, trademarks and
service marks, and other proprietary intellectual property rights. The Company
relies upon a combination of copyright,
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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 training and consulting 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 December 31, 1999, the Company had 800 full-time employees, 564 of
whom were based in the United States and 236 of whom were based in the United
Kingdom. Of this total, 215 employees were involved in the sale, delivery and
support of training services, 453 employees were involved in the sale, delivery
and support of consulting services, 51 employees were involved in the sale,
marketing, development and support of software products, and 81 were involved in
corporate level management and administration. In addition, the Company from
time to time retains the services of subcontractors for certain consulting and
training engagements.
The Company places significant emphasis on the recruitment, training and
professional development of its employees, and believes that it offers
competitive compensation and equity-based plans. 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. At year-end, the Company had seven full-time
recruiters.
The Company believes that its consultants and project managers benefit
from their ability to receive ongoing training in the latest technologies
through the Company's training division. 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 providers, including the Company, to keep their IT professionals
current in the latest technologies.
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 and instructors. The Company believes that by linking employee
compensation to the success of the Company, employees are encouraged to focus on
client satisfaction and to seek continuous professional development.
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EFFECT OF YEAR 2000 (Y2K) ISSUE AND Y2K READINESS DISCLOSURE
The Company developed a phased Y2K readiness plan to help it identify
and resolve Y2K issues associated with the Company's internal systems and the
services it provides. The plan includes development of corporate awareness,
assessment, implementation, validation testing and contingency planning.
The Y2K issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or products that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Even if Aris'
systems are fully Y2K compliant, if any of its material suppliers or vendors are
not fully Y2K compliant, it is possible that a system failure or miscalculations
could cause disruptions to the Company's operations or potential problems with
its product and service offerings.
The Company's consulting engagements often involve the implementation of
software applications that replace legacy systems of the client that are not Y2K
compliant. In the event that the Company is not able for any reason to meet its
contractual obligations with a client, the Company could be found liable for
damages as a result of that client's Y2K exposure. Such damages could include
costs associated with re-mediating the client's legacy systems to make them Y2K
compliant, and any other direct, indirect, consequential or incidental damages.
The Company endeavors to negotiate appropriate limitations of liability and
disclaimers regarding its Y2K and other liability in its agreements with
clients. Although the Company does not carry any endorsement or policy
specifically written for Y2K liability, the Company believes that its insurance
includes adequate coverage for damages that may result from any Y2K related
claim. However, there can be no guarantee that the Company will not be found
liable for Y2K-related damages as a result of services performed by the Company
on behalf of that client.
The Company has completed its assessment of its IT and non-IT systems,
material client and other third party relationships, and service and product
offerings to determine whether the Company faces any business or financial risk
from the Y2K issue. The Company's reliance on key suppliers, and therefore on
the proper function of their IT and non-IT systems, means that their failure to
address Y2K issues could have a material impact on the Company's operations and
financial results. Through its assessment, the Company has begun to identify
areas where the Company faces any business or financial risk, identify potential
solutions to address those risks, and to implement the solutions or develop a
comprehensive contingency plan in a timely manner in an effort to minimize the
Company's Y2K exposure. In addition to the Company's internal systems, the
Company relies on third party relationships in the conduct of its business. For
example, the Company relies on the services of the landlords of its facilities,
telecommunication companies, banks, utilities, and commercial airlines. The
Company intends to devise contingency plans to ameliorate the negative effects
on it in the event the Y2K issue results in the unavailability of services.
There can be no assurance that any contingency plans developed by the Company
will prevent any such service interruption on the part of one or more of the
Company's third party vendors or
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suppliers from having a material adverse effect on the Company's business,
results of operations or financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to Y2K issues could
result in a delay in the payment of invoices issued by the Company for services
and expenses. A failure of the accounting systems of a significant number of the
Company's clients would have a material adverse effect on the Company's
business, financial conditions, results of operations, and cash flows. The
Company has completed its risk assessment of its IT systems and will complete
its assessment of its other Y2K business and financial risks by the end of the
second quarter of 1999, including an assessment of the Y2K exposure and
readiness of material suppliers and vendors with whom the Company does business.
The Company has completed its upgrade to a Y2K compliant version of both its
internal accounting software and its proprietary time and billing, class
registration and operational software, ACETS. If further tests of the Company's
IT and non-IT systems, material third party relationships, and service and
product offerings reveal other Y2K compliance problems, or any of the Company's
material third party suppliers or vendors do not successfully and in a timely
manner achieve Y2K compliance, the Company's business or operations could be
adversely affected.
The foregoing discussion of the Company's Y2K readiness contains
forward-looking statements including estimates of the timeframes and costs for
addressing the known Y2K issues confronting the Company and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of the Company to identify and correct all Y2K problems and the
success of third parties with whom the Company does business in addressing their
Y2K issues.
January 1, 2000 has come and gone, and as a result of the Company's
analysis of its computer programs and operations, it has concluded that its
business systems are Y2K compliant. A related potential problem stems from the
fact that 2000 is a rare leap-year and some have expressed concern that
programmers or component designers may have forgotten to properly take that fact
into account. While there may be some risk relating to the anomalous leap-year
in 2000, management believes that any remaining Y2K problems will not seriously
impact or have a material adverse effect on the Company's expenses, business,
including data gathering and interpretation, or its operations. However, there
can be no assurance that unanticipated events still will not occur or that third
party payors and vendors have or had the ability to identify and solve all or
substantially all their Y2K issues. Therefore, there can be no assurance that
the Y2K issue still will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Bellevue,
Washington. These premises consist of approximately 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 Aris Information Technology
Training, Inc. ("AITT"), Aris Interactive, Inc. ("AII"), ASI and Aris
(International), L.L.C. ("Aris International"). The Company and its subsidiaries
also lease facilities in various locations listed in the table below (as of
March 1, 2000):
<TABLE>
<CAPTION>
NO. OF
APPROXIMATE CLASSROOMS/
LOCATION SQUARE FOOTAGE SEATS FUNCTION
- -------- -------------- -------------- --------
<S> <C> <C>
Bellevue, WA 23,500 11/144 Training, Consulting
Beaverton, OR 7,900 5/72 Training, Consulting,
Software
Columbia, SC 2,000 --- Consulting
Dallas, TX 4,900 8/60 Training
Denver, CO 11,000 5/50 Training, Consulting
Fairfax, VA 17,000 5/102 Training, Consulting
Livingston, NJ 7,100 --- Consulting
Plano, TX 17,000 12/75 Training, Consulting
Renton, WA 6,700 --- Telemarketing
Seattle, WA 15,650 --- Consulting
Tampa, FL 4,500 --- Consulting
West Palm Beach, FL 10,529 --- Consulting
Birmingham, UK 7,800 6/66 Training
London, UK 14,400 18/180 Training
Oxford, UK 5,000 --- UK HQ, Consulting
Oxford, UK 8,000 6/80 Training
Reading, UK 3,000 -- Consulting
Heidelberg, Germany 900 2/26 Training
</TABLE>
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 1, 2000, the Company was
not involved in any material legal proceedings.
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<PAGE> 14
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, 1999.
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 10, 2000 was 151. During 1999, the Company had warrants
listed on the Nasdaq National Market (symbol "ARSCW") which expired on February
15, 2000. Such warrants were issued as consideration to the former holders of
warrants of InTime in connection with the InTime Merger and commenced trading on
the Nasdaq National Market on July 16, 1998. Each of these warrants entitled the
holder to purchase one share of Aris Common Stock at an exercise price of
$22.98. As of March 10, 2000 there were no warrants listed for quotation on the
Nasdaq National Market.
In connection with the acquisition of fine.com, warrants previously held
by the warrantholders of fine.com were converted into warrants to purchase the
number of shares of Aris common stock and cash received for each outstanding
share of fine.com common stock exchanged in the merger. As of March 10, 2000,
110,883 of these warrants remained outstanding.
The Company has not declared or paid any cash dividends on its Common
Stock since 1993. 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 prices for the Company's Common Stock and warrants to
purchase the Company's Common Stock for each quarter in 1998 and 1999 are as
follows:
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<PAGE> 15
COMMON STOCK
<TABLE>
<CAPTION>
YEAR STOCK PRICE
---- -----------
1998 High Low
---- ---
<S> <C> <C>
First Quarter........................... $30.50 $21.00
Second Quarter.......................... $36.38 $25.88
Third Quarter........................... $30.38 $21.94
Fourth Quarter.......................... $24.50 $ 8.88
1999 High Low
---- ---
First Quarter........................... $14.63 $8.00
Second Quarter.......................... $10.63 $7.31
Third Quarter........................... $ 9.31 $5.31
Fourth Quarter.......................... $13.50 $4.94
</TABLE>
WARRANTS TO PURCHASE COMMON STOCK
<TABLE>
<CAPTION>
YEAR WARRANT PRICE
---- -------------
1998 High Low
---- ---
<S> <C> <C>
First Quarter........................... N/A N/A
Second Quarter.......................... N/A N/A
Third Quarter........................... $7.88 $4.19
Fourth Quarter.......................... $5.06 $0.94
1999 High Low
---- ---
First Quarter........................... $1.94 $0.63
Second Quarter.......................... $0.84 $0.13
Third Quarter........................... $0.50 $0.06
Fourth Quarter.......................... $0.22 $0.06
</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, 1999, the Company has applied
$4.0 million of the proceeds from its initial public offering (the "Offering")
to the repayment of the Company's revolving bank loan, $9.0 million in
connection with the acquisition of other companies, and $15.8 million 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 its has used the Offering proceeds in a manner consistent
with the use of proceeds described in the Registration Statement. As of December
31, 1999, substantially all of the Offering proceeds have been used.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data as of and for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 are set forth below (in thousands,
except per share data).
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $25,530 $43,896 $76,286 $115,894 $ 117,973
Costs and Expenses $24,825 $41,662 $70,387 $114,494 $ 120,496
Net income (loss) $ 705 $ 2,234 $ 5,899 $ 1,400 $ (2,523)
Basic earnings (loss) per share $ 0.09 $ 0.27 $ 0.60 $ 0.13 $ (0.22)
Diluted earnings (loss) per share $ 0.09 $ 0.26 $ 0.56 $ 0.12 $ (0.22)
</TABLE>
FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
securities available for sale $ 4,562 $ 3,516 $26,859 $ 11,738 $ 10,500
Total assets $12,306 $20,675 $60,551 $ 69,481 $ 74,582
Shareholders' equity $ 9,358 $13,190 $50,482 $ 55,314 $ 60,134
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenue is derived from the sale and delivery of its
consulting and training services and sales of licenses and maintenance and
support agreements for its software products. Consulting revenue is derived
primarily from fees billed to clients for consulting services. 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, measured by the cost incurred to date and cost
to complete compared to estimated total costs for the contract. 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, fees charged to individual students for open
enrollment classes, fees from curriculum and custom courseware development for
corporate clients and vendors such as Microsoft, fees derived from the licensing
of proprietary courseware to third parties, and fees from performance
improvement consulting and other consulting-based education services. Training
is provided at client facilities, at Aris' training centers, and over the
Internet or corporate intranets. In its open enrollment classes, the Company
seeks to fill each available
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<PAGE> 17
seat in each scheduled class. The Company continuously monitors this fill rate
and may cancel or reschedule classes that are under-enrolled.
The Company derives software revenue from the sale of its proprietary
software products, Aris DFRAG, TAMS, TAMS/O, Noetix Web Query and the
NoetixViews suite of products, and from maintenance and support contracts with
clients who purchase the software products. Revenue is recognized when the
software product has been shipped, collection is probable and there are no
significant obligations of the Company remaining to be performed. Software
maintenance and support is billed at the beginning of the contract period and is
recognized ratably throughout the term of the contract.
SIGNIFICANT EVENTS AND RECENT ACQUISITIONS
As of July 1, 1999, Aris transferred the assets of its United States
training operations into a wholly owned subsidiary, Aris Information Technology
Training, Inc. ("AITT"), and aligned its training divisions worldwide under
common management.
During the third quarter of 1999, in a continuing effort to improve the
profitability of its training division and focus corporate resources on the
Company's overall eBusiness strategy, Aris closed three unprofitable training
centers located in New York, Minneapolis and Chicago. The costs associated with
the closing of these centers is approximately $6.6 million including payments of
$1.4 million for employee severance expenses, lease terminations and termination
of contract obligations, $4.5 million for reductions in carrying value of
assets, representing a write-off of $3.5 million of goodwill and $1.0 million of
leasehold improvements, furniture and equipment and $700,000 of other expenses.
The cost of closure was charged to expense in the quarter ending September 30,
1999. Revenue from these centers was $7.4 million or 18% of total training
revenue for the year ended December 31, 1998, and $3.0 million or 11% of total
training revenue for the nine months ended September 30, 1999.
On August 31, 1999, Aris completed its acquisition of fine.com
International Corp. ("fine.com"), in a merger in which the shareholders of
fine.com received an aggregate of 1,470,574 shares of the Company's Common
Stock, plus approximately $3.0 million cash, representing an aggregate value of
$4.553 per outstanding share of fine.com Common Stock. The consideration for the
outstanding shares was approximately $12.3 million plus related acquisition
costs. In addition, outstanding options to purchase Common Stock of fine.com
were converted to options to purchase Common Stock of Aris, and warrants to
purchase the Common Stock of fine.com were converted into warrants to purchase
the amount of Aris Common Stock and cash that would have been received at the
effective time of the merger by a holder of the amount of fine.com Common Stock
issuable upon exercise of the warrant. The acquisition was accounted for under
the purchase method of accounting. Excess purchase price was allocated to
identified intangible assets acquired which are amortized over varying lives by
classification.
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<PAGE> 18
1999 COMPARED TO 1998
TOTAL REVENUE
Total revenue increased $2.1 million to $118.0 million for 1999 from
$115.9 million for 1998, representing a 2% increase.
Consulting revenue increased $10.6 million to $74.6 million for 1999
from $64.0 million for 1998, representing a 17% increase. Consulting revenue
represents 63% of total revenue for 1999 as compared to 55% for 1998. Consulting
revenue increased as a result of an overall increase in the level of consulting
activity due to the increased focus on eBusiness services as well as the
acquisition of fine.com.
Training revenue decreased $5.6 million to $34.8 million for 1999 from
$40.4 million for 1998, representing a 14% decrease. The decrease in training
revenue for 1999 is attributable to the closure of the three training centers
coupled with lower demand from Aris' customers due to increased internal focus
on IT issues related to Y2K and fewer software releases. The Company offered
6,950 classes and 17,048 training days during 1999 as compared to 7,572 classes
and 20,135 training days during 1998. The number of classes and training days
decreased 8% and 15%, respectively, during 1999 as compared to 1998.
Software revenue decreased $2.9 million to $8.6 million for 1999 from
$11.5 million for 1998, representing a decrease of 25%. The decrease in revenue
is due primarily to a reduction in the sales of the NoetixViews suite of
products by the Company's wholly-owned subsidiary. The decrease in sales is due
to a general slowdown of ERP sales and partial saturation of the potential
market due to the successful penetration of the NoetixViews product into the
Oracle ERP customer base. Revenues related to the Company's TAMS/O product
decreased to $1.0 million for the year ended December 31, 1999 compared to $1.5
million for the year ended December 31, 1998.
COST OF REVENUES
Cost of revenues increased $4.8 million to $60.1 million in 1999 from
$55.3 million in 1998, representing an increase of 9%. The increase in cost of
revenues is primarily a reflection of the purchase of fine.com and increasing
labor rates due to the tight labor market. Cost of revenues as a percentage of
revenues increased from 48% for 1998 to 51% for 1999. The increase in cost of
revenues as a percentage of revenues was caused by lower consulting utilization
due to client pre-Y2K concerns and lower fill rate in our training centers also
due to customers internal focus on Y2K issues, and increased labor rates out
pacing training revenues. During 1999, consulting and training cost of revenues
was $58.6 million or 50% of total revenues compared to $53.3 million or 46% of
total revenues in 1998. Software cost of revenues was $1.5 million in 1999,
representing 1.3% of total revenues compared to $1.7 million or 1.5% of total
revenues in 1998.
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<PAGE> 19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense increased $2.0 million to $50.8 million or 43% of revenues
for 1999 from $48.8 million or 42% of revenues for 1998, representing an
increase of 4%. The increase in SG&A expenses is primarily the result of
increased labor costs due to a tight labor market.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangibles increased $1.4 million to $2.0 million
during 1999, compared to $631,000 during 1998. Amortization of intangibles
primarily consists of the amortization of goodwill of acquired companies where
the transactions were accounted for under the purchase method of accounting. The
increase arises primarily as a result of goodwill from the fine.com acquisition.
ACQUISITION RELATED CHARGES
The Company recorded acquisition related charges totaling $383,000
during 1999, compared to $5.7 million in 1998. For 1999, these acquisition
related charges are primarily integration costs associated with the acquisition
of fine.com.
RESTRUCTURING AND OTHER EXPENSES
As discussed in Part II, Item 7, Significant Events, during the third
quarter of 1999, the Company closed three unprofitable training centers and
recorded a restructuring charge of $6.6 million. Management believes that the
costs expensed in 1999 should be sufficient to provide for the cost of closing
these training centers. The Company estimates the restructuring will result in
improved income from operations of approximately $1.5 million annually.
OTHER INCOME, NET
Other income, net, decreased $439,000 to $719,000 during 1999 from $1.2
million in 1998. Other income, net, consists primarily of interest income on
cash and cash equivalents and finance charges on accounts receivable. During
1999 and 1998, average investments were $8.7 million and $14.4 million,
respectively.
INCOME TAX EXPENSE
Income tax expense decreased $1.3 million to $1.3 million in 1999 from
$2.6 million for 1998. As a percentage of revenue, income tax expense decreased
from 2.3% in 1998 to 1.1% in 1999. There is no tax benefit for the write-off of
goodwill and amortization of intangibles, which totaled $5.6 million for 1999
and $631,000 for 1998. Management estimates that exclusive of the amortization
of intangibles, acquisition-related charges and reorganization costs, the
Company's effective tax rate decreased from 40.6% in 1998 to 34.4% in 1999.
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<PAGE> 20
NET INCOME (LOSS)
Net income decreased $3.9 million to a net loss of $2.5 million (-2.1%
of revenue) for 1999 from net income of $1.4 million (1.2% of revenue) for 1998.
The decrease is primarily a result of reorganization charges incurred in
connection with the restructuring of the education division, increased
amortization of intangibles associated with the acquisition of fine.com and
acquisition related charges. Exclusive of amortization of intangibles,
acquisition related charges and reorganization costs, net income would have been
$5.1 million or approximately 4% of revenue and $7.7 million or approximately 7%
of revenue for 1999 and 1998, respectively.
1998 COMPARED TO 1997
TOTAL REVENUE
Total revenue increased $39.6 million to $115.9 million for 1998 from
$76.3 million for 1997, representing a 52% increase.
Consulting revenue increased $21.3 million to $64.0 million for 1998
from $42.7 million for 1997, representing a 50% increase. Consulting revenue
increased as a result of an overall increase in the level of consulting activity
as well as the acquisition of MMT Computer Limited ("MMT").
Training revenue increased $11.5 million to $40.4 million for 1998 from
$28.9 million for 1997, representing a 40% increase. A significant portion of
the increase in training revenue for 1998 is attributable to businesses acquired
by the Company subsequent to September 30, 1997. Revenue increased in 1998 as a
result of a significant increase in the number of classes and class training
days offered. The Company offered 7,572 classes and 20,135 training days during
1998 as compared to 5,870 classes and 15,059 training days during 1997.
Software revenue increased $6.8 million to $11.5 million for 1998 from
$4.7 million for 1997, representing an increase of 146%. The increase in revenue
is primarily attributable to sales of the NoetixViews suite of products by Aris
Software, Inc. ("ASI").
COST OF REVENUES
Cost of revenues increased $17.8 million to $55.3 million in 1998 from
$37.5 million in 1997, representing an increase of 48%. The increase in cost of
revenues is primarily a reflection of the increase in revenues and the
activities associated with such revenues and restructuring costs included in
1998. Cost of revenues as a percentage of revenues decreased from 49% for 1997
to 48% for 1998. Exclusive of reorganization expenses, cost of revenues were 47%
of revenues in 1998. The reduction in cost of revenues as a percentage of
revenues was caused by the relative increase in the sale of software products
that have a lower percentage of costs of revenues compared to the Company's
training and consulting operations. During 1998, consulting and training cost of
revenues was $53.3 million or 46%
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<PAGE> 21
of total revenues compared to $36.6 million or 48% of total revenues in 1997.
Software cost of revenues was $1.7 million in 1998, representing 1.5% of total
revenues compared to $831,000 and 1.1% of total revenues in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense increased $19.9 million to $48.8 million or 42% of revenues
for 1998 from $28.9 million or 38% of revenues for 1997, representing an
increase of 69%. The increase in SG&A expenses is primarily the result of an
increased number of management, sales and administrative staff from 264 at
December 31, 1997 to 369 at December 31, 1998 and the Company's increased focus
on recruiting and marketing.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangibles increased $251,000 to $631,000 during 1998,
compared to $380,000 during 1997. Amortization of intangibles primarily consists
of the amortization of goodwill of acquired companies where the transactions
were accounted for under the purchase method of accounting. The increase arises
primarily as a result of goodwill being amortized throughout 1998 for
acquisitions completed in the fourth quarter of 1997.
ACQUISITION RELATED CHARGES
The Company recorded acquisition related charges totaling $5.7 million
during 1998, compared to $428,000 in 1997. For 1998, these acquisition related
charges include costs such as business brokerage, legal and accounting fees as
well as integration costs primarily associated with the acquisitions of Barefoot
Computer Training Limited ("Barefoot") and with InTime Systems International,
Inc. ("InTime") which were accounted for as poolings of interests during 1998.
RESTRUCTURING AND OTHER EXPENSES
In December 1998, the Company recorded a charge amounting to $2.9
million, of which $303,000 is included as a component of cost of revenues
associated with restructuring of the Company's training operations and the
settlement of a claim. The Company utilized all accrued expenses associated with
this restructuring in the first two quarters of 1999.
OTHER INCOME, NET
Other income, net, increased $17,000 to $1.2 million during 1998 from
$1.1 million in 1997. Other income, net, consists primarily of interest income
on cash and cash equivalents and from finance charges on accounts receivable. In
1997 other income, net, included $280,000 from the gain on sale of investments.
During 1998 and 1997, average investments were $14.4 million and $14.9 million,
respectively.
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<PAGE> 22
INCOME TAX EXPENSE
Income tax expense decreased $1.1 million to $2.6 million in 1998 from
$3.7 million for 1997. As a percentage of revenue, income tax expense decreased
from 4.8% in 1997 to 2.3% in 1998. This decrease is a result of a decrease in
pre-tax income from $9.6 million in 1997 to $4.0 million in 1998. However, the
Company is not allowed deductions from taxable income for certain acquisition
charges incurred during 1998. Such non-deductible charges have caused the
Company's income tax expense as a percentage of pre-tax income to increase from
38% in 1997 to 65% in 1998.
NET INCOME
Net income decreased $4.5 million to $1.4 million (1.2% of revenue) for
1998 from net income of $5.9 million (7.7% of revenue) for 1997. The decrease is
primarily a result of reorganization charges incurred in connection with the
restructuring of the training division and acquisition related charges. The
decrease in income as a percentage of sales is primarily a result of lower gross
profit from the Company's training division. Exclusive of acquisition and
reorganization expenses, net income would have been $7.7 million or
approximately 7% of revenue and $6.0 million or approximately 8% of revenue for
1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had working capital of $32.8
million including cash and cash equivalents of $10.5 million. At December 31,
1998, the Company had working capital of $28.7 million including cash, cash
equivalents and marketable debt securities of $11.7 million. The Company intends
to finance its working capital needs, as well as purchases of additional
property and equipment for its operations, from cash generated by operations and
available cash.
During 1999, the Company's cash balance increased by $5.3 million.
Operating activities provided $5.3 million cash, net of the use of $2.3 million
for the decrease of accounts payable. The Company's investing activities
provided cash in the amount of $1.9 million through the sale of marketable
securities in the amount of $6.5 million, net of purchases of property and
equipment of $1.9 million, and cash paid for the acquisition of fine.com of $2.7
million, net of cash received. In February 1999, the Company used $3.1 million
cash to repurchase 355,000 shares of its Common Stock. Financing activities
during 1999 used cash of $1.7 million, net of $1.1 million cash generated from
the issuance of Common Stock and stock option exercises.
Net cash of $1.7 million was used during 1998. Cash used in operating
activities was $1.4 million, which included an increase of accounts receivable
of $10.9 million arising as a result of revenue growth of $39.6 million during
the year. Investing activities included the net sales of investments of $13.2
million, purchase of property and equipment amounting to $11.7 million and the
purchases of MMT and db-Centric, Inc. ("db-Centric") amounting to $3.7 million.
Property and equipment purchases include $5.2 million for the Company's
headquarters building in Bellevue, Washington.
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<PAGE> 23
The Company has financed its acquisitions of businesses through cash
generated by operating activities and its initial public offering, promissory
notes and the issuance of warrants and Common Stock. The Company believes that
it will be able to continue to fund all capital required by the Company,
including cash needed to acquire new businesses, with cash generated from
operations, cash currently on hand, bank financing and/or the issuance of
additional debt or equity securities. The Company has a $10 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 collateralized 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. At
December 31, 1999, there were no borrowings against the credit line. The credit
line expires on June 1, 2000.
Management anticipates that during 2000, cash and marketable securities
will continue to be employed for general corporate purposes including the
potential opening of new offices, potential acquisitions of companies and other
business opportunities as they may arise. The Company anticipates that capital
expenditures related to these purposes will continue to be financed by
operational cash flows as well as utilization of invested funds, if needed.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, " Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. The Company does not use
derivative instruments, therefore the adoption of this statement will not have
any effect on the Company's results of operations or its financial position.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." This pronouncement summarizes certain of the SEC staff's
views on applying generally accepted accounting principles to revenue
recognition. We are required to adopt SAB No. 101 for our fiscal year ending
December 31, 2001. We are currently reviewing the requirements of SAB No. 101,
but do not expect such adoption to have an impact on our results of operations,
financial position or cash flows.
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<PAGE> 24
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 factors
discussed below and elsewhere in this Form 10-K have been discussed in the
Company's prior filings with the SEC. Management of the Company wishes to
caution readers that the following 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. Additional
discussion of forward-looking statements is included in Part I, Item 1 of this
Form 10-K.
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 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
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. 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. No assurance can
be given that the Company will be successful in managing its growth.
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,
PeopleSoft and Sun. The Company participates in a number of Microsoft, Oracle,
Lotus, PeopleSoft and Sun programs that may 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
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<PAGE> 25
client referrals or render actions which might adversely affect the Company's
ability to compete successfully.
PROFITABILITY OF TRAINING OPERATIONS
The Company restructured its training division in the fourth quarter of
1998 and in the third quarter of 1999. Although the Company expects that
traditional open-enrollment, classroom-based training will continue to be a
significant part of the Company's training strategy, the Company intends to
focus more resources on customized private training and consulting-based
education services for corporate clients and alternative training delivery
systems, including Internet- and intranet-based training using audio and video
streaming and other "webcasting" technologies. Although the Company believes
that these initiatives should increase the profitability of its training
operations, there can be no assurance that these initiatives will be successful.
Any failure by the Company to restore the profitability of its training
operations may have a material adverse effect on the Company's business and
operations. The operations and profitability of the Company's consulting and
software businesses may be adversely impacted due to the shared resources of the
Company's integrated consulting, training and software strategy.
RAPID TECHNOLOGICAL CHANGE
The Company's success also depends in part on its ability to identify
emerging IT trends and develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. This may require the Company to make substantial expenditures to
develop new consulting services, course titles and courseware, to hire new
consultants, project managers and instructors and to acquire new software and
hardware. If the Company is unable, for financial or other reasons, to make
those expenditures, hire additional qualified personnel, make the necessary
acquisitions, or timely recognize emerging IT trends, the Company's ability to
compete effectively may be materially and adversely affected.
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 undertakes fixed price, fixed deliverable
consulting projects. 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
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<PAGE> 26
project plan upon which the fixed price/fixed schedule contract is based could
have a material adverse effect on the profitability of such projects.
Many of the Company's engagements involve projects that are critical to
the operations of its clients' businesses and provide benefits that may be
difficult to quantify. Any failure in a client's information system could result
in a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. Although the Company generally
attempts to limit contractually its liability for damages arising from negligent
acts, errors, mistakes or omissions in rendering its services, there can be no
assurance that the limitations of liability set forth in its service contracts
will be enforceable or would otherwise protect the Company from liability for
damages. The Company maintains general liability insurance coverage against
claims of up to $8.0 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, result of operations and cash flows.
The Company's consulting engagements often involve the implementation of
software applications that replace legacy systems of the client that are not Y2K
compliant. In the event that the Company is not able for any reason to meet its
contractual obligations with a client, the Company could be found liable for
damages as a result of that client's Y2K exposure. Such damages could include
costs associated with remediating the client's legacy systems to make them Y2K
compliant, and any other direct, indirect, consequential or incidental damages.
The Company endeavors to negotiate in its agreements with clients appropriate
limitations of liability and disclaimers regarding its Y2K and other liability.
The Company believes that its insurance includes coverage for damages that may
result from any Y2K related claim, however, the Company does not carry any
specialized coverage for potential Y2K liability. However, there can be no
guarantee that the Company will not be found liable for damages which relate to
the Y2K exposure of its clients as a result of services performed by the Company
on behalf of that client.
INTERNATIONAL OPERATIONS
A substantial portion of the Company's revenue is 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, currency exchange fluctuations 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
-26-
<PAGE> 27
adverse effect on the Company's international operations and, consequently, on
the Company's consolidated financial condition, results of operations and cash
flows. 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.
GROWTH THROUGH ACQUISITIONS
The Company may continue to acquire businesses that the Company believes
will complement its operations. The success of any acquisition 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, results of
operations and cash flows. 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.
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. 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 multinational accounting firms, the
consulting divisions of software vendors such as Oracle, Microsoft, Lotus and
PeopleSoft, 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, the training
divisions and authorized training channels of software vendors such as Oracle,
Sun, and
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<PAGE> 28
Microsoft, and independent international, national and regional companies with
IT training operations.
Aris DFRAG, TAMS and TAMS/O may compete with software products
distributed by other companies. Although the Company believes few commercially
available products currently compete directly with NoetixViews, Oracle
introduced a software product with some similar features and functionality
during 1999. 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.
Generally, there can be no assurance that any future products or
services developed by competitors will not achieve greater market acceptance
than the Company's software products and services. Failure by the Company to
compete successfully in the consulting, training or software market could have a
material adverse effect on the Company's business, financial condition, result
of operations and cash flows.
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.
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
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<PAGE> 29
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, result of operations and cash flows. Any adverse
determination in such litigation could subject the Company to significant
liabilities.
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
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 principally 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.
INTELLECTUAL PROPERTY RIGHTS
The Company uses certain proprietary consulting and training
methodologies; courseware; software applications and products; trademarks and
service marks and other proprietary and intellectual property rights. The
Company relies upon a combination of copyright, trademark and trade secret laws,
as well as nondisclosure and other contractual arrangements, to protect these
proprietary rights. The Company uses client licensing agreements and employee
and third party nondisclosure and confidentiality agreements to limit access to,
and distribution of, its proprietary information. There can be no assurance that
the steps taken by the Company to protect its intellectual property rights will
be adequate to deter misappropriation of such rights or that the Company will be
able to detect unauthorized uses and take immediate or effective steps to
enforce its rights. If substantial unauthorized uses of the Company's
proprietary rights were to occur the Company could be required to engage in
costly and time-consuming litigation to enforce its rights. In addition, the
Company does business in countries that do not provide protection or enforcement
of intellectual property rights to the same extent as the United States, and on
the Internet, which is not currently subject to comprehensive regulation.
The Company develops custom software applications and methodologies, and
training courses 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
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<PAGE> 30
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; his wife, Tina
Song, the Company's Vice President of Administration; and a limited liability
company controlled by the Songs beneficially owned 33.8% of the Company's
outstanding shares of Common Stock at December 31, 1999. 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.
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.
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<PAGE> 31
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to Aris is the effect of changes in foreign
currency exchange rates. Income from Aris' foreign operations is frequently
denominated in foreign currencies, thereby creating exposures 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Consolidated Balance Sheets - December 31, 1998 and 1999 32
Consolidated Statements of Operations - years ended December 31,
1997, 1998 and 1999 33
Consolidated Statements of Shareholders' Equity - years ended
December 31, 1997, 1998 and 1999 34
Consolidated Statements of Cash Flows - years ended December 31,
1997, 1998 and 1999 35
Notes to Consolidated Financial Statements 36
Report of PricewaterhouseCoopers LLP, Independent Accountants 56
Report of BDO Stoy Hayward, Chartered Accountants 57
</TABLE>
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<PAGE> 32
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
ASSETS 1998 1999
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 5,225 $ 10,500
Investments in marketable securities ................................... 6,513 --
Accounts receivable, net of allowance for
doubtful accounts of $1,263 and $2,497 ............................... 26,734 27,600
Consulting contracts in progress ....................................... 983 2,173
Income tax receivable .................................................. 293 863
Deferred income taxes .................................................. 448 477
Prepaid expenses and other current assets .............................. 2,359 5,095
------- --------
Total current assets ................................................ 42,555 46,708
Property and equipment, net ............................................... 16,075 14,833
Intangible and other assets, net .......................................... 10,851 13,041
------- --------
Total assets ........................................................ $69,481 $ 74,582
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 3,345 $ 3,056
Accrued compensation and benefits ...................................... 3,385 4,002
Other accrued expenses ................................................. 4,792 4,067
Deferred revenue ....................................................... 2,333 2,366
Income tax payable ..................................................... -- 411
------- --------
Total current liabilities ........................................... 13,855 13,902
------- --------
Deferred income taxes ..................................................... 312 546
------- --------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred Stock, without par value; 5,000,000 shares authorized;
none issued and outstanding ........................................ -- --
Common Stock, without par value; 100,000,000 shares
authorized, 11,269,523 and 12,646,143 issued and
outstanding ........................................................ -- --
Additional paid-in capital ............................................. 47,347 54,904
Retained earnings ...................................................... 7,956 5,433
Accumulated other comprehensive income (loss) .......................... 11 (203)
------- --------
Total shareholders' equity .......................................... 55,314 60,134
------- --------
Total liabilities and shareholders' equity .......................... $69,481 $ 74,582
======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-32-
<PAGE> 33
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------- --------- ---------
<S> <C> <C> <C>
Revenues, net:
Consulting ....................................... $42,731 $ 64,036 $ 74,620
Training ......................................... 28,896 40,398 34,774
Software ......................................... 4,659 11,460 8,579
------- --------- ---------
Total revenues, net .......................... 76,286 115,894 117,973
------- --------- ---------
Cost of revenues:
Consulting and training .......................... 36,635 53,250 58,593
Software ......................................... 831 1,710 1,510
Restructuring expenses ........................... -- 303 --
------- --------- ---------
Total cost of revenues ....................... 37,466 55,263 60,103
------- --------- ---------
Gross profit ..................................... 38,820 60,631 57,870
Selling, general and administrative expense .......... 28,916 48,822 50,799
Amortization of intangible assets .................... 380 631 2,007
Research and development expense ..................... 649 -- --
Charges related to acquisitions ...................... 428 5,655 383
Restructuring and other expenses ..................... -- 2,641 6,600
------- --------- ---------
Income (loss) from operations ................ 8,447 2,882 (1,919)
------- --------- ---------
Other income (expense):
Investment income (expense) ...................... 280 (5) --
Interest income, net ............................. 800 1,148 892
Other income (expense) ........................... 61 15 (173)
------- --------- ---------
1,141 1,158 719
------- --------- ---------
Income (loss) before income tax ...................... 9,588 4,040 (1,200)
Income tax expense ................................... 3,689 2,640 1,323
------- --------- ---------
Net income (loss) .................................... $ 5,899 $ 1,400 $ (2,523)
======= ========= =========
Basic earnings (loss) per share ...................... $ 0.60 $ 0.13 $ (0.22)
======= ========= =========
Weighted average number of common shares -
Basic ............................................. 9,803 11,115 11,605
======= ========= =========
Diluted earnings (loss) per share .................... $ 0.56 $ 0.12 $ (0.22)
======= ========= =========
Weighted average number of common and
potential common shares - Diluted .................. 10,532 11,900 11,605
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------ ADDITIONAL OTHER TOTAL
SHARES PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
ISSUED AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
------ ------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 .......................... 8,618 $ -- $ 8,169 $ 4,776 $ 245 $ 13,190
Shares issued in initial public
offering, net of offering costs ..................... 2,300 31,242 31,242
Shares and warrants issued
in acquisitions ................................. 434 4,371 4,371
Stock redemption .................................... (415) (121) (3,906) (4,027)
Stock options exercised ............................. 50 88 88
Net income .......................................... 5,899
Other comprehensive income (loss),
net of tax:
Foreign currency translation adjustments ..... 7
Unrealized gains on securities, net of
reclassification adjustment .................... (288)
Comprehensive income ................................ 5,618
------ ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1997 ........................ 10,987 -- 43,749 6,769 (36) 50,482
Adjustment to conform fiscal year of
Barefoot Computer Training Limited ............. (213) (213)
Shares issued in acquisition ........................ 5 150 150
Shares issued under employee stock
purchase plan .................................. 130 1,504 1,504
Stock options exercised ............................. 147 1,449 1,449
Tax benefit related to stock options exercised ...... 495 495
Net income .......................................... 1,400
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ........ (16)
Unrealized gains on securities, net of
reclassification adjustment .................... 63
Comprehensive income ................................ 1,447
------ ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1998 ........................ 11,269 -- 47,347 7,956 11 55,314
Shares issued in acquisition ........................ 1,471 9,260 9,260
Shares issued under employee stock
purchase plan .................................. 107 757 757
Stock redemption .................................... (355) (3,073) (3,073)
Stock options exercised ............................. 154 353 353
Tax benefit related to stock options exercised ...... 228 228
Non-cash stock-based compensation ................... 32 32
Net loss ............................................ (2,523)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments ........ (214)
Comprehensive loss .................................. (2,737)
------ ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1999 ........................ 12,646 $ -- $ 54,904 $ 5,433 $ (203) $ 60,134
====== ====== ======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- -----
<S> <C> <C> <C>
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gain (loss) arising
during the period ....................... $ (8) $ 59 $ --
Less: reclassification adjustment for losses
(gains) including in net income ......... (280) 4 --
----- ---- -----
Net unrealized gains (losses) on securities . $(288) $ 63 $ --
===== ==== =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 35
Aris Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 5,899 $ 1,400 $ (2,523)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .............................. 2,454 3,888 5,176
Provision for doubtful accounts receivable ................. 166 346 434
Loss on sale of property and equipment ..................... -- -- 137
Gain on sale of investments ................................ (280) -- --
Impairment charges and write-offs .......................... -- 559 4,997
Non-cash compensation expense .............................. -- -- 32
Changes in assets and liabilities net of effects
of acquisitions:
Increase in accounts receivable .......................... (4,712) (10,875) (876)
Increase in consulting contracts in progress ............. (164) (365) (1,190)
(Increase) decrease in income tax receivable ............. 186 (293) (570)
(Increase) decrease in prepaid expenses and .............. (1,069) 1,155 1,476
other assets
Increase (decrease) in accounts payable .................. 58 (222) (2,329)
Increase (decrease) in accrued expenses .................. 130 4,112 (108)
Increase (decrease) in deferred revenue .................. 705 (224) 33
Increase (decrease) in income taxes payable .............. 441 (603) 411
Increase (decrease) in deferred taxes
(452) (273) 234
-------- -------- --------
Net cash provided by (used in) operating activities ........ 3,362 (1,395) 5,334
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ...................................... (32,436) (11,103) --
Sales of investments .......................................... 14,005 24,316 6,513
Purchase of property and equipment ............................ (2,656) (11,700) (1,948)
Acquisition of businesses, net of cash acquired ............... (1,726) (3,650) (2,735)
Proceeds from sale of property and equipment................... -- -- 60
-------- -------- --------
Net cash provided by (used in) investing activities ..... (22,813) (2,137) 1,890
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs .. 31,242 -- --
Issuance of Common Stock ...................................... -- 668 757
Stock options exercised ....................................... 88 627 353
Repurchase of Common Stock .................................... (4,027) -- (3,073)
Tax benefit related to stock options exercised ................ -- 495 228
Payments on borrowings ........................................ (12,601) -- --
Proceeds from borrowings ...................................... 9,825 -- --
-------- -------- --------
Net cash provided by (used in) financing activities ........ 24,527 1,790 (1,735)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 5,076 (1,742) 5,489
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .... -- (16) (214)
ADJUSTMENT TO CONFORM FISCAL YEAR OF BAREFOOT COMPUTER
TRAINING LIMITED .......................................... -- (213) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 2,120 7,196 5,225
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 7,196 $ 5,225 $ 10,500
======== ======== ========
</TABLE>
See Note 16 for supplemental cash flow information.
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aris Corporation ("Aris" or the "Company") provides a range of
integrated information technology solutions including database management,
enterprise resource planning, custom applications development and packaged
applications implementation, and training to clients worldwide, with offices in
Bellevue, Seattle and Renton, Washington; Beaverton, Oregon; Denver, Colorado;
Dallas and Plano, Texas; Fairfax, Virginia; Tampa and West Palm Beach, Florida;
Columbia, South Carolina; Livingston, New Jersey; Oxford, Birmingham, Reading
and London, England; and Heidelberg, Germany. Aris also develops niche software
programs which it has licensed worldwide.
CONSOLIDATION
The consolidated financial statements include the accounts of Aris and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF 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
disclosures of contingent assets and liabilities as of 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform to current year presentations. Such reclassifications had no effect on
previously reported net income or loss, shareholders' equity or cash flows.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with an
original maturity of three months or less.
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<PAGE> 37
CONCENTRATION OF CREDIT RISK
The Company places its temporary cash investments with major financial
institutions. As of December 31, 1999, all of the Company's temporary cash
investments were placed with one institution.
The Company's customers are from diverse industries and geographic
locations. For the years ended December 31, 1997, 1998, and 1999, no single
customer accounted for more than 10% of the Company's net revenues. At December
31, 1998 and 1999, there were no significant accounts receivable from a single
customer. The Company does not require collateral to support credit sales.
Allowances are maintained for potential credit losses and sales returns.
INVESTMENT SECURITIES
Aris' investment in marketable securities at December 31, 1998 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 taxes, is included as a component of accumulated other
comprehensive income. Cost of securities sold is determined using the specific
identification method. The Company had no investment securities as of December
31, 1999.
INVENTORIES
Inventories consist of course materials and are recorded at the lower of
cost or market, as determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. Additions, improvements and
major replacements are capitalized. For financial reporting purposes,
depreciation is provided using the straight-line method over the estimated
useful lives of depreciable assets. Estimated useful lives of computers,
equipment and software range from three to eight years and lives of building and
improvements range 15 to 39 years.
The Company has adopted Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. This pronouncement has not had
a material impact on the Company's financial statements.
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<PAGE> 38
INTANGIBLE ASSETS
Intangible assets include the cost of business acquisitions allocated to
capitalized software, non-compete agreements, customer lists, trained work
force, leasehold valuations, tradename, and goodwill which are amortized over
approximately three years for capitalized software, approximately two years for
non-compete agreements, three years for customer lists and trained work force,
six years for leasehold valuation, one year for tradename and five, seven or
fifteen years for goodwill. Amortization of capitalized software 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 ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" as issued by
the Financial Accounting Standards Board ("FASB"). SFAS No. 121 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 Aris 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, Aris 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. The Company expensed $649,000
of in-process research and development in 1997.
REVENUE RECOGNITION
TIME AND MATERIAL CONSULTING CONTRACTS
Aris recognizes revenue as services are rendered.
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<PAGE> 39
FIXED-PRICE CONSULTING CONTRACTS
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the cost incurred to date and cost
to complete compared to estimated total costs for the contract. This method is
used because management considers expended costs together with estimates of
remaining costs to be the best available measure of contract performance.
Contract costs include all direct labor, material and 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 ratably throughout the period that classes
are held.
SOFTWARE
Aris accounts for software revenues in accordance with the American
Institute of Certified Public Accountants' SOP 97-2, "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.
Aris 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 SFAS No.
109, "Accounting for Income Taxes". Under the liability method of SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and of tax loss and
credit carryforwards, 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 $600,000, $495,000 and $121,000 in 1997, 1998 and 1999,
respectively.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of Aris' foreign subsidiaries have been
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation". Under the provisions of SFAS No. 52, all assets and liabilities in
the balance sheet of the foreign
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<PAGE> 40
subsidiaries, 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 included as a component of accumulated other comprehensive income.
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 balance sheets 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 sheets.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for by following FASB Statement
No. 123, "Accounting for Stock-Based Compensation." 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
("APB") No. 25 or the fair value method described in FASB 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. Aris has elected to
continue accounting for its employee stock-based compensation under the
provisions of APB No. 25.
EARNINGS PER SHARE
Basic earnings per share is calculated as income available to Common
Shareholders 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 dilutive securities 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 No.128.
COMPREHENSIVE INCOME
In addition to net income, comprehensive income includes charges or
credits to equity that are not the result of transactions with shareholders. The
composition of accumulated other comprehensive income is reflected in the
statement of changes in shareholders' equity.
The unrealized gains on securities is shown net of tax of ($35,000), $0
and $0 at December 31, 1997, 1998 and 1999, respectively.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that
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<PAGE> 41
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
adopted SFAS No. 131 and has provided the disclosures needed to conform with its
requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. In July 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The Company does not use derivative instruments, therefore
the adoption of this statement will not have any effect on the Company's results
of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." This pronouncement summarizes certain of the SEC staff's
views on applying generally accepted accounting principles to revenue
recognition. We are required to adopt SAB No. 101 for our fiscal year ending
December 31, 2001. We are currently reviewing the requirements of SAB No. 101,
but do not expect such adoption to have an impact on our results of operations,
financial position or cash flows.
2. POOLINGS OF INTERESTS WITH BAREFOOT COMPUTER TRAINING LIMITED AND
INTIME SYSTEMS INTERNATIONAL, INC.
On February 28, 1998, Aris completed a merger with Barefoot Computer
Training Limited ("Barefoot"), a company that provides information technology
training services in London, England. Under the terms of the merger, Aris issued
278,611 shares of Common Stock in exchange for all of the outstanding shares of
Barefoot Common Stock. The acquisition was accounted for as a pooling of
interests and, accordingly, all periods prior to February 28, 1998 included in
these consolidated financial statements have been restated to give effect to the
merger.
Barefoot had a November 30 year end and, accordingly, Barefoot's
statement of operations for the year ended November 30, 1997 has been combined
with Aris' statement of operations for the year ended December 31, 1997. In
order to conform Barefoot's year end to Aris' year end, Barefoot's financial
statements for the month of December 1997 are not
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<PAGE> 42
included in the statements of operations or cash flows for 1997. Barefoot's net
loss for December 1997 decreased retained earnings as of January 1, 1998.
On June 30, 1998, the Company completed a merger with InTime Systems
International, Inc. ("InTime"), a Delaware corporation having its principal
offices in West Palm Beach, Florida. InTime, now a division of the Company,
provides information technology and human resource management systems consulting
services focusing primarily on Oracle and PeopleSoft technologies. The
acquisition was accounted for as a pooling of interests, in which the Company
issued 786,710 shares of Common Stock in exchange for all of the outstanding
shares of InTime Common Stock and warrants to purchase 718,997 shares of Common
Stock in exchange for all of the outstanding warrants to purchase shares of
InTime Common Stock. Accordingly, all periods prior to June 30, 1998 included in
the consolidated financial statements furnished herein have been restated to
give effect to the merger.
A reconciliation of amounts of revenue and earnings for the year ended
December 31, 1997 and the three months ended March 31, 1998, previously reported
by Aris to the combined amounts presented herein follows (in thousands):
<TABLE>
<CAPTION>
Adjustment Adjustment
For the year ended December 31, 1997: Aris as reported Barefoot InTime Combined
---------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Revenue $55,131 $ 7,419 $13,736 $ 76,286
======= ======= ======= ========
Net income $ 5,345 $ 410 $ 564 $ 6,319
======= ======= ======= ========
Adjustment(1) (420)
--------
Consolidated net income $ 5,899
========
For the three months ended March 31, 1998:
Revenue $20,737 $ 4,497 $ 25,234
======= ======= ========
Net income $ 1,045 $ 355 $ 1,400
======= ======= ========
</TABLE>
(1) The adjustment to previously reported income in 1997 is to record deferred
tax assets of InTime in the total amount of $420,000 which could be offset
with future reversals of deferred tax liabilities of Aris upon the merger
of InTime into Aris effective June 30, 1998.
3. RESTRUCTURING AND OTHER EXPENSE
In December 1998, the Company restructured its training operations to
gain efficiency and profitability. As a result of the restructuring, the Company
incurred expenses aggregating $2.2 million, including $873,000 for employee
severance, $559,000 for equipment and asset abandonment, $593,000 for
anticipated lease disposition costs and $160,000 associated with other aspects
of the restructuring. At December 15, 1998, $1.3 million of the amount accrued
was paid. The Company completed the restructuring and utilized all accrued costs
by June 30, 1999.
Additionally, in 1998, the Company settled a litigation claim and
expensed $759,000. Management believes that a portion of the litigation
settlement cost may be recovered from insurance proceeds.
In August 1999, in a continuing effort to improve the profitability of
its training
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<PAGE> 43
division, Aris closed three unprofitable training centers located in New York,
Minneapolis and Chicago. The estimated costs associated with the closing of
these centers was approximately $6.6 million. A summary of the related costs and
accrual activity is as follows (in thousands):
<TABLE>
<CAPTION>
REDUCTION IN
CONTRACT CARRYING OTHER
EMPLOYEE & LEASE VALUE OF RELATED
SEVERANCE TERMINATIONS ASSETS COSTS TOTAL
--------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Initial Expense $ 175 $ 1,209 $ 4,497 $ 719 $ 6,600
Amounts utilized in 1999 (175) (313) (4,497) (719) (5,704)
----- ------- ------- ----- -------
Accrual, December 31, 1999 $ -- $ 896 $ -- $ -- $ 896
===== ======= ======= ===== =======
</TABLE>
The remaining balance accrued for contract and lease terminations at
December 31, 1999, represents estimated lease payments through July 2000, net of
sublease income, and estimated brokers commissions and improvements deemed
necessary to sublet the spaces. This remaining balance is expected to be
utilized during 2000.
In January 2000, Aris negotiated a lease termination for the Minneapolis
location at a cost of $250,000. Additionally, subsequent to year end, the
Company sublet the Chicago location through the remaining life of the lease.
4. ACQUISITIONS
Aris has embarked upon an acquisition program that included the
acquisition of four companies during 1997, two companies during 1998 and one
company in 1999, which 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 completed. The results
of operations of the acquired companies have been included in consolidated
results of operations of Aris from the date of the acquisitions. The following
is a description of the terms of the various acquisitions:
1997
On February 28, 1997, Aris acquired the stock of Oxford Computer Group
Limited, now Aris (UK) Limited ("Aris (UK)"), 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, Aris acquired the stock of Enterprise Computing
Inc.(doing business as Buller, Owens and Associates ("Enterprise")), an
information technology training company located in New York, New York, in
exchange for 62,531 shares of unregistered Common Stock, warrants to purchase
20,844 shares of unregistered Common Stock and $1.6 million cash. In connection
with the acquisition of Enterprise, Aris entered into a $500,000 earn-out
agreement with the former shareholders based on attainment of certain future
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<PAGE> 44
financial goals. During 1998 and 1999, Aris paid an aggregate of $255,000 and
$240,000, respectively, pursuant to the earn-out agreement. These agreements
terminated during 1999.
On November 1, 1997, Aris acquired the stock of Agiliti, Inc.
("Agiliti"), an information technology training company located in Bloomington,
Minnesota, in exchange for 50,941 shares of unregistered Common Stock.
On November 1, 1997, Aris acquired the stock of Absolute!, Inc.
("Absolute!"), an information technology training company located in Dallas,
Texas, in exchange for 40,909 shares of unregistered Common Stock and $100,000
cash. In connection with the acquisition of Absolute!, Aris entered into a
$500,000 earn-out agreement with the former shareholder based on attainment of
certain future financial goals. During 1998, Aris paid an aggregate of $250,000
pursuant to the earn-out agreement, of which $150,000 was exchanged for
approximately 5,000 unregistered shares of Common Stock. This agreement
terminated during 1998.
A summary of assets acquired, liabilities assumed and purchase price
paid for the 1997 acquisitions is as follows (in thousands):
<TABLE>
<CAPTION>
ARIS (UK) ENTERPRISE AGILITI ABSOLUTE!
--------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Consideration:
Cash ........................................ $ -- $ 1,560 $ -- $ 100
Value of Common Stock ....................... 1,400 1,125 950 709
Value of warrants ........................... -- 187 -- --
Acquisition costs ........................... 96 -- 15 --
------- ------- ------- -----
$ 1,496 $ 2,872 $ 965 $ 809
======= ======= ======= =====
</TABLE>
The cost allocated to the assets and liabilities at the date of the
acquisition is as follows (in thousands):
<TABLE>
<CAPTION>
ARIS (UK) ENTERPRISE AGILITI ABSOLUTE!
--------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Cash ........................................ $ 5 $ -- $ -- $ 40
Accounts receivable ......................... 1,140 365 493 297
Prepaid and other current assets ............ 337 39 70 8
Goodwill .................................... 1,095 2,672 1,066 902
Property and equipment ...................... 1,283 212 350 60
Notes payable ............................... -- -- (930) (76)
Accounts payable and accrued liabilities .... (2,364) (416) (84) (422)
------- ------- ------- -----
$ 1,496 $ 2,872 $ 965 $ 809
======= ======= ======= =====
</TABLE>
1998
On April 30, 1998, Aris, through Aris (UK), acquired all of the
outstanding stock of MMT Computer Limited ("MMT"), an information technology
consulting company located in Reading, England, in exchange for $2.5 million
cash ((pound)1,500,000).
On August 10, 1998, Aris, through Aris Software, Inc. ("ASI"), a
wholly-owned subsidiary, acquired all of the assets of db-Centric, Inc.
("db-Centric"), a decision support
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<PAGE> 45
systems administrative software company focusing on distributed data warehouse
management in exchange for $1 million cash.
A summary of the purchase price paid for the 1998 acquisitions is as
follows (in thousands):
<TABLE>
<CAPTION>
MMT db-CENTRIC
------- ----------
<S> <C> <C>
Consideration:
Cash ..................................................... $ 2,499 $1,000
Acquisition costs ........................................ 152 --
------- ------
$ 2,651 $1,000
======= ======
</TABLE>
The cost allocated to the assets and liabilities at the date of the
acquisition is as follows (in thousands):
<TABLE>
<CAPTION>
MMT db-CENTRIC
------- ----------
<S> <C> <C>
Cash ..................................................... $ 1 $ --
Accounts receivable ...................................... 622 --
Prepaid and other current assets ......................... 1,077 --
Goodwill ................................................. 1,498 1,000
Property and equipment ................................... 200 --
Notes payable, accounts payable and accrued liabilities .. (747) --
------- ------
$ 2,651 $1,000
======= ======
</TABLE>
1999
On August 31, 1999, through Aris Interactive, Inc. ("AII"), Aris
completed its acquisition of fine.com International Corp. ("fine.com"), in a
merger in which the shareholders of fine.com received an aggregate of 1,470,574
shares of the Company's Common Stock, plus approximately $3.0 million cash,
representing an aggregate value of $4.553 per outstanding share of fine.com
Common Stock. The consideration for the outstanding shares was approximately
$12.3 million plus related acquisition costs. In addition, outstanding options
to purchase Common Stock of fine.com were converted to options to purchase
Common Stock of Aris, and warrants to purchase the Common Stock of fine.com were
converted into warrants to purchase the amount of Aris Common Stock and cash
that would have been received at the effective time of the merger by a holder of
the amount of fine.com Common Stock issuable upon exercise of the warrant.
The acquisition was accounted for under the purchase method of
accounting. Excess purchase price was allocated to identified intangible assets
acquired which are amortized over varying lives by classification.
A summary of the purchase price paid for this acquisition is as follows
(in thousands):
<TABLE>
<S> <C>
Consideration:
Cash ............................................ $ 3,003
Value of Common Stock ........................... 9,260
Acquisition costs ............................... 313
-------
$12,576
=======
</TABLE>
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<PAGE> 46
The costs allocated to the assets and liabilities at the date of the
acquisition is as follows (in thousands):
<TABLE>
<S> <C>
Cash ..................................................... $ 581
Accounts receivable ...................................... 924
Prepaid and other current assets ......................... 398
--------
Intangible Assets:
Goodwill ............................................ 6,187
Non-compete agreement ............................... 1,900
Customer list ....................................... 1,800
Trained work force .................................. 1,100
Leasehold valuation ................................. 450
Trade name .......................................... 200
--------
Total intangibles .................................. 11,637
Property and equipment ................................... 1,076
Notes payable, accounts payable and accrued liabilities .. (2,040)
--------
$ 12,576
========
</TABLE>
PRO FORMA RESULTS
The following unaudited pro forma summary presents the consolidated
results of operations of Aris as if the entities (as described in Note 4)
acquired in 1997, 1998 and 1999 had been acquired as of the beginning of the
periods presented, including the impact of adjustments to amortize intangible
assets acquired and record consolidated income tax expense at Aris' effective
tax rate (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997(1) 1998(2) 1999(3)
-------- --------- ---------
<S> <C> <C> <C>
Net revenues ....................... $ 94,555 $ 123,629 $ 122,840
Net income (loss) .................. $ 1,884 $ (5,847) $ (4,044)
Basic earnings (loss) per share .... $ 0.17 $ (0.46) $ (0.32)
Diluted earnings (loss) per share .. $ 0.16 $ (0.46) $ (0.32)
</TABLE>
(1) Adjusted to include the results of operations of Aris (UK), Enterprise,
Agiliti and Absolute! prior to acquisition and the results of operations of
MMT and db-Centric for the year ended December 31, 1997 and the results of
operations for fine.com for the year ended January 31, 1998, including the
impact of certain adjustments.
(2) Adjusted to include the results of operations of MMT and db-Centric prior
to acquisition and the results of operations of fine.com for the year ended
January 31, 1999, including the impact of certain adjustments.
(3) Adjusted to include the results of operations of fine.com 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 acquisitions had been in effect for the years
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
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<PAGE> 47
Aris recorded expenses associated with acquisition of businesses during
1997, 1998 and 1999 (including mergers with Barefoot and InTime (see Note 2)
during 1998) of $428,000, $5.7 million, and $383,000, respectively. In 1997 and
1999 such costs were primarily incurred in connection with the integration of
business systems of acquired companies. In 1998, costs were primarily for
investment banking and professional fees and expenditures to facilitate
integration of business systems of acquired businesses with Aris following the
mergers.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
-------- --------
<S> <C> <C>
Land and building ....................................... $ 5,220 $ 5,228
Computer equipment ...................................... 9,817 10,903
Furniture and fixtures .................................. 2,869 2,769
Software ................................................ 582 780
Leasehold improvements .................................. 2,857 2,976
Other ................................................... 410 388
-------- --------
21,755 23,044
Accumulated depreciation ................................ (5,680) (8,211)
-------- --------
$16,075 $ 14,833
======= ========
</TABLE>
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
-------- --------
<S> <C> <C>
Goodwill ................................................ $ 11,205 $ 16,854
Capitalized software costs .............................. 1,025 --
Non-compete agreements .................................. 150 1,900
Prepaids and other ...................................... 2,770 1,736
-------- --------
15,150 20,490
Accumulated amortization ................................ (1,940) (2,354)
-------- --------
13,210 18,136
Current portion ......................................... (2,359) (5,095)
-------- --------
Noncurrent intangibles and other assets, net ........ $ 10,851 $ 13,041
======= ========
</TABLE>
7. INVESTMENTS
Investments in marketable securities at December 31, 1998 consisted of
investments in debt securities totaling $6.5 million. These investments were
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 accumulated other
comprehensive income in shareholders' equity at December 31, 1998.
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<PAGE> 48
8. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current: Federal .......................... $ 3,023 $ 2,532 $ 1,245
State ............................ 328 354 219
Foreign .......................... 370 98 499
------- ------- -------
3,721 2,984 1,963
------- ------- -------
Deferred: Federal ......................... 32 (372) (536)
State ........................... (52) (55) (79)
Foreign ......................... (12) 83 (25)
------- ------- -------
(32) (344) (640)
------- ------- -------
Total income tax expense ............. $ 3,689 $ 2,640 $ 1,323
======= ======= =======
</TABLE>
Pretax income of Aris' foreign subsidiaries aggregated $1.1 million,
$472,000 and $1.4 in 1997, 1998 and 1999, respectively. The principal reasons
for the variation between income taxes at the statutory federal rate and that
shown in the consolidated statements of income are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate .............. $ 3,260 $ 1,374 $ (408)
Goodwill ....................................... 66 178 1,567
Nondeductible acquisition costs ................ -- 794 --
State income taxes, net of federal income tax
benefit......................................... 224 179 145
Nondeductible meals and entertainment .......... 53 88 100
Other .......................................... 86 27 (81)
------- ------- -------
$ 3,689 $ 2,640 $ 1,323
======= ======= =======
</TABLE>
Temporary differences which give rise to deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
----- -------
<S> <C> <C>
Adjustments to cash basis accounting for tax purposes ........ $(281) $ --
Depreciation and amortization ................................ (374) (350)
Intangible assets ............................................ (46) (1,846)
----- -------
Deferred tax liabilities ............................ (701) (2,196)
----- -------
Bad debt allowance ........................................... 585 786
Accrued vacation and bonuses ................................. 68 116
Net operating loss carry-forward ............................. 86 1,133
Other ........................................................ 98 92
----- -------
Deferred tax assets ................................. 837 2,127
----- -------
$ 136 $ (69)
===== =======
</TABLE>
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<PAGE> 49
9. DEBT
At December 31, 1999, Aris had a $10 million line of credit that was
collateralized by substantially all of Aris' assets. All of this line was
available at December 31, 1999. Borrowings against the line of credit bear
interest at the lender's prime rate.
Additionally, at December 31, 1999, Aris UK had a (pound)250,000, or
approximately $400,000, overdraft facility collateralized by Aris UK's assets
and a guarantee of (pound)220,000 or approximately $350,000 by Aris Corporation
collateralizing all liabilities of Aris (UK). The balances under this facility
at December 31, 1998 and 1999 were $0 and $219,000, respectively. Borrowings
against the facility bear interest at the lender's base rate plus 3%, which was
8.5% at December 31, 1999.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Aris rents 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 (in thousands):
<TABLE>
<S> <C>
2000.................... $ 3,502
2001.................... 3,328
2002.................... 3,016
2003..................... 2,178
2004..................... 1,895
Thereafter.............. 6,309
--------
$ 20,228
========
</TABLE>
Rent expense for 1997, 1998 and 1999 was $2.2 million, $3.9 million and
$4.5 million, respectively.
LEGAL PROCEEDINGS
Aris 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 Aris'
consolidated financial position, results of operations or cash flows.
11. SHAREHOLDERS' EQUITY
In June 1997, Aris completed an initial public offering of 2.3 million
shares of Common Stock with net proceeds of approximately $31.2 million.
The Company initiated on January 1, 1998, the 1998 Employee Stock
Purchase Plan (the "ESPP"). Under the ESPP, employees may elect to set aside up
to 10% of their gross
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<PAGE> 50
compensation, up to a maximum of $25,000 per year, to purchase shares of Common
Stock at a 15% discount to market price. Executive officers (other than the
Chief Executive Officer) may participate in the ESPP on the same terms as
eligible, non-executive employees.
12. EARNINGS PER SHARE
Basic earnings per share is calculated as income available to common
shareholders divided by the weighted average number of shares of Common Stock
outstanding during the periods. Diluted earnings per share is based on the
weighted average number of shares of Common Stock and potential common shares
outstanding during the periods, including options and warrants computed using
the treasury stock method.
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 potential common 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>
(In thousands) YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Weighted-average number of common shares outstanding 9,803 11,115 11,605
Effect of dilutive securities:
Warrants ......................................... 3 68 --
Options .......................................... 726 717 --
------ ------ ------
729 785 --
------ ------ ------
Weighted-average number of common and
Common equivalent shares outstanding ............... 10,532 11,900 11,605
====== ====== ======
</TABLE>
Options to purchase certain shares of Common Stock were outstanding in
1997, 1998 and 1999, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares.
Dilutive securities include options and warrants on an as if converted
basis. Potentially dilutive securities totaling 284,000 for the year ended
December 31, 1999, were excluded from diluted loss per share because of their
anti-dilutive effect.
13. STOCK OPTIONS AND WARRANTS
Prior to January 1995, Aris from time to time granted non-qualified
stock options to key employees. These grants were not part of any formal plan.
In January 1995, Aris 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 Aris as determined by the Plan Administrator. Aris authorized
1,600,000 shares of its Common Stock for issuance under the 1995 Plan. The date
of grant, option price, vesting period and other terms specific to options
granted under the 1995 Plan are determined by the Plan Administrator. The option
price for
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<PAGE> 51
stock options granted is based on the fair market value of Aris' 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. Aris ended grants under
the 1995 Plan in March 1997.
In March 1997, Aris 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
Aris as determined by the Plan Administrator. Aris 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 Aris' 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. On April 28, 1998, the shareholders of the Company approved an
increase in the number of shares of Common Stock available for issuance under
the 1997 Plan to 2,000,000 shares and subsequently, on May 24, 1999, the
shareholders of the Company approved a further increase to 2,225,000 shares.
In connection with the acquisition of Enterprise in 1997 (as discussed
in Note 4), Aris issued warrants to purchase 20,844 shares of Common Stock with
an exercise price of $23.988 and a fair value of $8.95. Additionally, during
1997 Aris issued warrants to purchase 4,000 shares of Common Stock with an
exercise price of $10.00 to certain Aris consultants.
In connection with the acquisition of InTime (as discussed in Note 2),
Aris issued warrants to purchase 718,997 shares of Common Stock as consideration
to the former holders of warrants of InTime. The warrants commenced trading on
the Nasdaq National Market on July 16, 1998. Each warrant entitled the holder to
purchase one share of the Company's Common Stock at an exercise price of $22.98
with an expiration date of February 15, 2000.
On December 15, 1998, the Company completed its voluntary stock option
exchange with existing employees holding options granted under the Company's
1997 Stock Option Plan. Senior management was precluded from participating in
that exchange. Eligible employees electing to participate in the exchange
surrendered their existing options and received new options to purchase 20%
fewer shares of the Company's Common Stock at an exercise price of $9.75 per
share, upon a modified vesting schedule.
In connection with the acquisition of fine.com (as discussed in Note 4),
Aris issued 110,883 warrants to purchase the number of shares of Aris Common
Stock and cash received for each outstanding share of fine.com Common Stock
exchanged in the merger. The warrants expire on August 11, 2002.
A summary of the activity for non-qualified stock options granted prior
to 1995, the 1995 Plan, and the 1997 Plan is presented below:
-51-
<PAGE> 52
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year .. 354,000 $ 2.12 1,452,000 $ 9.63 1,918,000 $ 9.94
Granted ........................... 1,259,000 $ 11.34 1,822,000 $ 18.91 1,401,000 $ 6.36
Exercised ......................... (47,000) $ 1.47 (147,000) $ 4.42 (155,000) $ 2.29
Forfeited ......................... (114,000) $ 8.22 (1,209,000) $ 23.79 (728,000) $ 10.82
------- --------- ---------
Outstanding at end of year ........ 1,452,000 $ 9.65 1,918,000 $ 9.94 2,436,000 $ 8.31
========= ========= =========
Options exercisable at year-end ... 162,000 $ 1.10 394,000 $ 8.72 571,000 $ 9.27
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Weighted-average fair value of options granted with
exercise prices less than the market value of the stock
at the date of grant $ -- $ -- $ 4.20
Weighted-average fair value of options granted with
exercise prices equal to the market value of the stock
at the date of grant $11.34 $19.65 $ 4.37
Weighted-average fair value of options granted with
exercise prices greater than the market value of the
stock at the date of grant $ -- $ -- $ 0.11
Weighted-average exercise price of options granted with
exercise prices less than the market value of the stock
at the date of grant $ -- $ -- $ 3.71
Weighted-average exercise price of options granted with
exercise prices equal to the market value of the stock
at the date of grant $1.34 $18.91 $ 7.27
Weighted-average exercise price of options granted with
exercise prices greater than the market value of the
stock at the date of grant $ -- $ -- $ 9.00
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
OUTSTANDING
WEIGHTED-
RANGE AVERAGE WEIGHTED- WEIGHTED-
OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.19 - $ 5.41 1,167,000 7.29 $ 4.83 237,000 $ 3.74
$ 5.42 - $ 9.75 914,000 7.38 $ 9.27 212,000 $ 9.47
$ 9.76 - $31.38 355,000 7.22 $17.30 122,000 $19.72
</TABLE>
-52-
<PAGE> 53
Aris applies APB No. 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for stock options issued to employees. Had
compensation cost for the options been determined based upon the fair value at
the grant date consistent with the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, Aris' net income and net income per
share would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net income (loss) as reported.................... $ 5,899 $ 1,400 $ (2,523)
Net income (loss) pro forma...................... $ 5,615 $ (694) $ (3,480)
Basic earnings (loss) per share as reported...... $ 0.60 $ 0.13 $ (0.22)
Diluted earnings (loss) per share as reported.... $ 0.56 $ 0.12 $ (0.22)
Basic earnings (loss) per share pro forma........ $ 0.57 $ (0.06) $ (0.30)
Diluted earnings (loss) per share pro forma...... $ 0.53 $ (0.06) $ (0.30)
</TABLE>
The fair value of each stock option granted in 1997, 1998 and 1999 was
estimated on the date of grant using the Black-Scholes single option method. The
following weighted-average assumptions were used for grants in 1997, 1998 and
1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Assumptions:
Risk free interest rate........... 6.75% 4.54% 5.67%
Expected holding period........... 4.75 years 4.75 years 4.75 years
Dividend yield.................... 0% 0% 0%
Expected volatility................ 59.0% 94.0% 68.2%
</TABLE>
14. PROFIT SHARING PLAN
Aris maintains a qualified defined contribution profit sharing 401(k)
plan which covers full time employees with at least one month of service. There
were no employer contributions to the plan for 1997. In 1998, the Company
instituted a 401(k) matching contribution program whereby the Company matched
each employees' contribution on a dollar-for-dollar basis up to $800 per
participating employee. During 1998 and 1999, the Company contributed $256,000
and $248,000, respectively, to the 401(k) plan.
15. RELATED PARTY TRANSACTIONS
In the first quarter of 1999, the Company invested $300,000 in a company
in which an officer of the investee is also a member of Aris' Board of
Directors. This investment is accounted for on the cost method, and is included
in Intangibles and Other Assets on the Company's consolidated balance sheet at
December 31, 1999. The Company also purchased $100,000 of equipment from the
investee in 1999.
In the third quarter of 1999, the Company recorded approximately $32,000
of non-
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<PAGE> 54
cash compensation expense related to the accelerated vesting of stock options
upon the resignation of a certain executive, who is also a relative of an
officer of the Company.
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING
AND FINANCING ACTIVITIES
Aris paid interest of $194,000, $49,000 and $93,000 during 1997, 1998
and 1999, respectively. Aris paid $3,375,000, $3,045,000 and $1,948,000 in
income taxes during 1997, 1998 and 1999, respectively.
As more fully described in Note 2, Aris merged with Barefoot and InTime
in transactions accounted for as poolings of interest. As more fully described
in Note 4, Aris has acquired seven companies in transactions accounted for as
purchases during the years ended December 31, 1997, 1998 and 1999.
17. OPERATING BUSINESS GROUPS
The Company's reportable segments have been determined based on the
nature of its operations, products offered to customers and information used by
the chief operating decision maker, as defined by SFAS No. 131. Aris is engaged
in three distinct businesses consisting of database and internet consulting
services, information technology training and software sales. The accounting
policies of the segments are the same as those described in the Summary of
Significant Accounting Policies. Segment operating results are measured based on
income (loss) before income taxes. Total revenue by segment represents sales to
unaffiliated customers. Inter-segment sales are not material. Assets are those
used in the operations of each industry segment. Corporate assets are not
allocated to segments and primarily consist of cash, investments, certain
prepaid expenses and certain property and equipment.
Summarized financial information by business group for 1997, 1998 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
CONSULTING TRAINING SOFTWARE
GROUP GROUP GROUP CORPORATE TOTAL
---------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
1997:
Revenues, net ............ $42,731 $28,896 $4,659 $ -- $76,286
Income (loss) before
income taxes ........... $12,824 $ 3,607 $ 836 $ (7,679) $ 9,588
Assets ................... $10,453 $18,584 $2,581 $ 28,933 $60,551
Depreciation and
Amortization ........... $ 173 $ 1,401 $ 435 $ 445 $ 2,454
Restructuring and other
expenses ............... $ -- $ -- $ -- $ -- $ --
Capital expenditures ..... $ 401 $ 1,600 $ 137 $ 518 $ 2,656
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
CONSULTING TRAINING SOFTWARE
GROUP GROUP GROUP CORPORATE TOTAL
---------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
1998:
Revenues, net ............ $64,036 $ 40,398 $11,460 $ -- $ 115,894
Income (loss) before
income taxes ........... $ 2,712 $ (5,641) $ 6,545 $ 424 $ 4,040
Assets ................... $20,701 $ 21,087 $ 4,093 $23,600 $ 69,481
Depreciation and
Amortization ........... $ 702 $ 2,402 $ 432 $ 352 $ 3,888
Restructuring and other
expenses ............... $ -- $ 2,641 $ -- $ -- $ 2,641
Capital expenditures ..... $ 2,564 $ 3,352 $ 131 $ 5,653 $ 11,700
1999:
Revenues, net ............ $74,620 $ 34,774 $ 8,579 $ -- $ 117,973
Income (loss) before
income taxes ........... $ 6,571 $(10,115) $ 2,241 $ 103 $ (1,200)
Assets ................... $36,894 $ 12,446 $ 4,646 $20,596 $ 74,582
Depreciation and
Amortization ........... $ 1,885 $ 2,124 $ 445 $ 722 $ 5,176
Restructuring and other
expenses ............... $ -- $ 6,600 $ -- $ -- $ 6,600
Capital expenditures ..... $ 505 $ 1,246 $ 109 $ 634 $ 1,948
</TABLE>
18. GEOGRAPHIC SEGMENT INFORMATION
Major operations outside the United States include Aris (UK) which was
purchased by Aris in 1997. Substantially all of Aris (UK)'s business relates to
sales in Europe, including the United Kingdom. Certain information regarding
geographic operations is presented in the table below (in thousands).
Intercompany sales between Aris (UK) and Aris are not material.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Revenues, net:
United States ............................ $ 59,604 $ 90,479 $ 86,820
Europe ................................... 16,682 25,415 31,153
-------- -------- --------
$76,286 $115,894 $117,973
======== ======== ========
Long-lived assets:
United States ............................ $ 11,519 $ 20,766 $ 21,953
Europe ................................... 3,803 6,160 5,367
-------- -------- --------
$ 15,322 $ 26,926 $ 27,320
======== ======== ========
</TABLE>
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<PAGE> 56
ARIS CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Aris Corporation
In our opinion, based on our audits and the report of other auditors,
the accompanying consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Aris Corporation and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Barefoot Computer
Training Limited, which statements reflect total revenues of $7,419,000 for
the year ended December 31, 1997. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Barefoot
Computer Training Limited, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, 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 and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
January 28, 2000
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<PAGE> 57
ARIS CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Barefoot Computer Training Limited
In our opinion, the balance sheet and the related statements of income,
of cash flows and of changes in shareholders' equity of Barefoot Computer
Training Limited (not presented separately herein) present fairly, in all
material respects, the financial position of Barefoot Computer Training Limited
at 30 November, 1997 and 1996 and the results of its operations and its cash
flows for each of the three years ended 30 November 1997, in conformity with
accounting principles generally accepted in the United States, all expressed in
British Pound Sterling. 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 auditing standards generally accepted in the
United States 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.
/s/ BDO STOY HAYWARD
BDO Stoy Hayward
Chartered Accountants
London, England
April 23, 1998
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<PAGE> 58
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 1999 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's 1999 fiscal year.
Certain information regarding the executive officers of the Company is set forth
in the 1999 definitive proxy statement.
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 - Schedule II - Valuation
and Qualifying Accounts for the three years in the period
ended December 31, 1999 - see Exhibit 99.1
All other financial statement 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.
(b) Reports on Form 8-K: A current report on Form 8-K was
filed with the Securities and Exchange Commission on September
14, 1999, for the purpose of reporting the acquisition of
fine.com International Corp.
(c) Exhibits - see index on page 60 of this Report.
-58-
<PAGE> 59
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE
---------
Schedule II Valuation and Qualifying Accounts Exhibit 99.1
-59-
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated August 5, (A)
1999 among the Company, fine.com International Corp., Aris
Interactive, Inc., Daniel M. Fine, Frank Hadam and Herbert L. Fine
(Exhibit 2.1)
3.1 Amended and Restated Articles of Incorporation. (Exhibit 3.1) (B)
3.2 Amended and Restated Bylaws. (Exhibit 3.2) (B)
4.1 Articles IV and V of the Amended and Restated Articles. (Exhibit 4.1) (B)
4.2 Articles II, IV, VI, VII, IX, X and XI of the Amended and Restated (B)
Bylaws. (Exhibit 4.2)
10.1 Applied Relational Information Systems, Inc. 1995 Stock Option (B)
Plan. (Exhibit 10.1) +
10.2 Aris Corporation 1997 Stock Option Plan. (Exhibit 10.2) + (B)
10.3 Aris Corporation 1998 Employee Stock Purchase Plan. (Exhibit 99.1) + (C)
10.4 Amendment Dated April 15, 1999 to Aris Corporation 1997 Stock (D)
Option Plan. (Exhibit 4.1) +
10.5 Amendment Dated April 15, 1999 to Aris Corporation (E)
1998 Employee Stock Purchase Plan. (Exhibit 4.1) +
10.6 Employment Agreement dated July 22, 1992 between the Company and (B)
Kendall W. Kunz. (Exhibit 10.4) +
10.7 Form of Indemnification Agreement for Directors and Officers (F)
10.8 Summary of Insurance held by the Company prepared by Acordia (B)
Northwest, Inc. on March 10, 1997. (Exhibit 10.8)
10.9 Credit Agreement between the Company and U.S. Bank of Washington, (B)
National Association, dated March 14, 1997. (Exhibit 10.9)
</TABLE>
-60-
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------------
<S> <C>
10.10 Registration Rights Agreement dated as of February 28, 1997 by and (B)
between the Company and certain holders of Common Stock. (Exhibit
10.10)
10.11 Registration Rights Agreement dated as of February 28, 1997 by and (B)
between the Company and Charles Henderson Cunningham. (Exhibit
10.11)
10.12 Sun Microsystems Educational Services U.S. Strategic Alliance (B)
Agreement by and between SunService, a division of Sun
Microsystems Inc. and the Company. (Exhibit 10.36)
10.13 Microsoft vendor contracts (Exhibit 10.37) (B)
10.14 Oracle vendor contracts (Exhibit 10.38) (B)
*21.1 List of the Company's Subsidiaries.
*23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
*23.2 Consent of BDO Stoy Hayward, Chartered Accountants.
**24.1 Power of Attorney (Included in the signature page to this
Registration Statement).
* 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-4 dated August 5, 1999
(SEC File number 333-84595)
(B) Incorporated by reference to designated exhibit included with the
Company's Registration Statement on Form S-1, registration number
333-25409.
(C) Incorporated by reference to designated exhibit included with the
Company's Registration Statement on Form S-8 filed with the SEC on
November 25, 1997, registration number 333-40921.
(D) Incorporated by reference to designated exhibit included with the
Company's Registration Statement on Form S-8 filed with the SEC on
December 30, 1999, registration statement number 333-93831.
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<PAGE> 62
(E) Incorporated by reference to designated exhibit included with the
Company's Registration Statement on Form S-8 filed with the SEC on
December 30, 1999, registration statement number 333-93829.
(F) Incorporated by reference to designated exhibit included with the
Company's Annual Report on Form 10-K for the fiscal year ending December
31, 1997.
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<PAGE> 63
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
By: /s/ PAUL Y. SONG
-------------------------------------
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 Timothy J. Carroll, 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 17th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Paul Y. Song Chairman of the Board, Chief Executive Officer and
- -------------------------------- President (Principal Executive Officer)
Paul Y. Song
/s/ TIMOTHY J. CARROLL Vice President, Finance, Chief Financial Officer
- -------------------------------- and Secretary
Timothy J. Carroll (Principal Financial and Accounting Officer)
/s/ Kendall W. Kunz Senior Vice President of Worldwide Consulting and
- -------------------------------- Director
Kendall W. Kunz
/s/ Bruce R. Kennedy Director
- --------------------------------
Bruce R. Kennedy
/s/ Kenneth A. Williams Director
- --------------------------------
Kenneth A. Williams
/s/ Barry L. Rowan Director
- --------------------------------
Barry L. Rowan
</TABLE>
-63-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
(WITH PRINCIPAL OFFICE LOCATION)
Aris Software, Inc.
Incorporated under the laws of Washington
2229 - 112th Avenue NE
Bellevue, WA 98004
Aris UK Limited
(formerly Oxford Computer Group Limited)
Incorporated under the laws of England and Wales
Wolsey Hall
66 Banbury Road
Oxford, England OX2 6PR
Aris (International), L.L.C.
A limited liability company organized under the laws of Washington
2229 - 112th Avenue NE
Bellevue, WA 98004
Aris Computer Services GmbH.
A German company with limited liability (Gesellschaft mit beschrankter Haftung)
Hebelstrase 22d
Heidelberg, Germany. 69115
Aris Interactive, Inc.
Incorporated under the laws of Washington
2229 - 112th Avenue NE
Bellevue, WA 98004
Aris Information Technology Training, Inc.
Incorporated under the laws of Washington
2229 - 112th Avenue NE
Bellevue, WA 98004
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-93829, No. 333-93831, No. 333-40923 and No.
333-68199) of Aris Corporation and its subsidiaries, of our report dated January
28, 2000 relating to the consolidated financial statements and financial
statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
March 17, 2000
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to use in the Annual Report on Form 10-K of Aris
Corporation for the fiscal year ending 31 December, 1999 (the "Form 10-K"), of
our report dated 23 April 1998 relating to the financial statements of Barefoot
Computer Training Limited for the years ended 30 November 1997 and 1996.
/s/ BDO STOY HAYWARD
BDO Stoy Hayward
Chartered Accountants
London, England
March 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,500
<SECURITIES> 0
<RECEIVABLES> 30,097
<ALLOWANCES> (2,497)
<INVENTORY> 0
<CURRENT-ASSETS> 46,708
<PP&E> 23,044
<DEPRECIATION> (8,211)
<TOTAL-ASSETS> 74,582
<CURRENT-LIABILITIES> 13,902
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,134
<TOTAL-LIABILITY-AND-EQUITY> 74,582
<SALES> 117,973
<TOTAL-REVENUES> 117,973
<CGS> 60,103
<TOTAL-COSTS> 119,892
<OTHER-EXPENSES> 173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (892)
<INCOME-PRETAX> (1,200)
<INCOME-TAX> 1,323
<INCOME-CONTINUING> (2,523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,523)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ARIS CORPORATION
FINANCIAL STATEMENT SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts .... $ 403 $ 676 $(162) $ 917
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts .... $ 917 $ 706 $(360) $1,263
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts .... $1,263 $1,672 $(438) $2,497
</TABLE>
