Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
For the transition period from __________ to ________
Commission file number 0-15935
ALTRIS SOFTWARE, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3634089
- --------------------------------- --------------------
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9339 Carroll Park Drive, San Diego, CA 92121
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
------------
(Title of class)
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 / /
(Cover page continues on next page)
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 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. / /
The aggregate market value of the voting stock on February 10, 2000,
held by non-affiliates* of the Registrant, based upon the last price reported on
the OTC Bulletin Board on such date was $36,071,019.
The number of shares outstanding of the Registrant's Common Stock at
the close of business on February 10, 2000 was 13,116,734.
*Without acknowledging that any individual director of Registrant is an
affiliate, all directors have been included as affiliates with respect to shares
owned by them.
PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in,
or incorporated by reference into, this report.
ITEM 1. BUSINESS
Altris Software, Inc. (the "Company") develops, markets and supports a
suite of three-tier client/server document management software products. These
products enable users in a broad range of industries to manage, share and
distribute critical business information, expertise and other intellectual
capital in an efficient manner. The Company's products provide several key
business benefits including interoperability and scalability across an
enterprise, deployment over the web, an extensive range of product tools and
features, quick cost-effective implementation, increasing network efficiency
using the Company's targeted image extraction technology ("TIE-Technology-TM-")
to substantially reduce network bandwidth requirements and the ability to
document-enable existing applications. In addition, the open architecture of the
Company's products permits them to be used in a standardized fashion and enables
sophisticated customization and integration with existing business applications.
Unlike many of its competitors, the Company offers its own cohesive set of
software products which provide a complete electronic document management system
("EDMS") without the high systems integration costs that can be incurred when
disparate products from a variety of suppliers must be integrated.
The Company has historically sold its suite of products through its
direct sales force and through complementary indirect channels primarily
consisting of value-added resellers ("VARs"), systems integrators and original
equipment manufacturers ("OEMs"). The Company has established a strong market
presence in the utility, manufacturing, transportation and petrochemical and
other processing industries both domestically and internationally. The Company's
marketing efforts are focused on these industries as well as in certain other
select vertical markets, including telecommunication providers, defense and
other governmental agencies, electrical and electronic equipment manufacturers,
engineering and construction firms, property management companies and
architecture firms. Additionally, the Company has begun marketing to Application
Service Providers (ASP's) to provide hosting and integration services for the
Company's product, allowing the ASP's to then resell or rent the Company's
products as a document management service on the internet.
HISTORY
The Company was incorporated in California in 1981. Throughout the mid
1980's, the Company focused on the development and manufacturing of proprietary
hardware components, as well as software, for EDMS. The Company's systems at
that time included a significant portion of imaging hardware components
developed and manufactured by the Company. In subsequent years, the Company
moved from proprietary hardware components for EDMS to open architecture,
client/server software systems, while also providing system integration
services. As part of this change, the Company implemented a restructuring
program that reduced costs and consolidated operations to a level consistent
with sales.
As a result of its early success, which generated a need for additional
capital to finance expected growth, the Company completed the initial public
offering of its common stock in June 1987, raising net proceeds of approximately
$19.6 million. In December 1991, seeking further financing to fund expected
growth, the Company issued common stock and warrants through a unit offering
which yielded net proceeds of approximately $2,965,000. Warrants issued in the
offering were exercised in 1995 yielding proceeds of approximately $4,230,000.
In September 1993, the Company acquired Optigraphics Corporation
("Optigraphics") for consideration valued at $8,400,000, comprised of $2,700,000
in cash, 1,120,559 shares of the Company's common stock and $1,734,000 in notes
which were paid in full in September 1995. Optigraphics, which was founded in
1982, provided software imaging solutions for enterprise systems, along with
traditional departmental systems. The Company was attracted to Optigraphics for
a number of factors, including the
1
technology behind its sophisticated workstation products, strong engineering
organization, broad customer base, including customers in the telecommunications
industry, experienced national sales force and international reseller
distribution capabilities.
On December 27, 1995, the Company acquired United Kingdom-based Trimco
Group plc ("Trimco") for total consideration of $14,165,000. Trimco, at the time
of acquisition, was recognized as a leading developer of software products for
the capture, viewing, mark-up editing, storage, distribution and workflow
management of documents. The purchase price was comprised of $5,550,000 in cash,
857,394 shares of the Company's common stock and a convertible promissory note
having a total principal amount of $1,000,000 due September 27, 1996 with
interest payable at 7% per annum. In addition, the purchase price included
obligations assumed which were payable to certain Trimco employees in connection
with the acquisition, consisting of cash of $1,051,000 and 50,300 shares of the
Company's common stock. Trimco was incorporated in 1988 in the United Kingdom
and has its principal offices in Ealing, London. Trimco's products focused on
applications involving office documents as well as technical documents such as
engineering drawings and blueprints and were marketed primarily through VARs,
distributors and systems integrators. The Company's purchase of Trimco brought
the Company's total number of customers to approximately 1,500 worldwide,
representing major markets in utilities, transportation, petrochemicals,
manufacturing, construction, telecommunications and media, government and
financial services.
On October 24, 1996, the Company changed its name from Alpharel, Inc.
to "Altris Software, Inc." to better reflect the integration of the Alpharel and
Trimco organizations and products.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% Subordinated Debenture due June 27, 2002
with a principal amount of $3,000,000 (the "Subordinated Debenture") and
warrants to purchase additional shares of Common Stock. The aggregate gross
proceeds to the Company from the private placement before expenses were
$6,000,000. The Subordinated Debenture, which was issued at 100% of par,
provides for quarterly interest payments and has a maturity date of June 27,
2002. In September 1998, the Company agreed to grant the holder of the
Subordinated Debenture a security interest, second in priority to the Company's
senior secured debt in substantially all of the Company's assets. In addition,
the interest payment terms were amended to require monthly rather than quarterly
payments. The Company may prepay the Subordinated Debenture prior to maturity
without penalty.
In May 1999, the Company exchanged 3,000 shares of Series E Convertible
Preferred Stock (the Series E Preferred Stock) for the issued and outstanding
Series D Preferred Stock. The Series E Preferred Stock bears a dividend of 11.5%
per annum, accruing quarterly, and is convertible into shares of the Company's
common stock at a conversion price of $1.90 per share. The Company may redeem
any or all of the Series E Preferred Stock at its stated value on or after June
27, 1999 at any time the 20-day average of the closing price of the common stock
equals or exceeds $9.50 per share, and the Company may redeem any or all of the
Series E Preferred Stock on or after June 27, 2002 at its stated value
irrespective of the trading price of its common stock. As the Company is
currently in default under the Preferred Stock Purchase Agreement as a result of
non-payment of dividends due on the Series D Preferred Stock in 1998, the
dividend rate on the Series E Preferred Stock has increased to 14%. See "Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters", and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources -- Certain Factors That May
Affect Future Results".
In May 1999, the Company completed a transaction with Spescom Ltd.
("Spescom"), whereby Spescom invested $1,800,000 for 2,000,000 shares of the
Company's common stock. In addition, as part of the agreement, Spescom paid the
Company an additional $1,000,000 and invested $1,200,000 directly into the
Company's United Kingdom subsidiary, formerly called Altris Software Ltd
("ASL"), for a 60% interest in ASL. In conjunction with the agreements the
Company contributed $400,000 into ASL and retained a 40% interest in ASL.
Subsequently in September 1999, Spescom agreed to loan $500,000 to the Company.
Under the terms of the loan, Spescom converted the loan balance into 1,428,571
shares of the Company's common stock in December 1999.
2
THE INDUSTRY
In today's marketplace, organizations are increasingly looking for
solutions to help manage their business information. Many companies are
overwhelmed by the amount and variety of information generated by their vendors,
customers, employees and consultants. As a result, organizations are seeking
computer-based information management solutions that enable them to improve
productivity, reduce costs, react quickly to changes in their marketplace,
improve customer service or comply with regulatory and quality certification
requirements.
Relational database management systems ("RDBMS") from leading companies
such as Oracle, Microsoft, Sybase Inc. and others were developed to enable
companies to manage certain business information such as customer names,
addresses and phone numbers, sales and accounting records, billing information
and inventory records. This type of data is often referred to as "structured"
data and is generally entered and stored in tables consisting of rows and
columns. While RDBMS enable companies to better store, process and analyze their
structured data, it is not common for RDBMS to manage so-called "unstructured"
data.
Unstructured data includes information generated by most software for
personal computers and workstations, such as word processing documents,
spreadsheets and computer-aided design ("CAD") drawings, as well as other types
of information which may not be in electronic format, such as manufacturing
procedures, maintenance records, training and technical manuals, facility
layouts, blueprints, product and parts drawings, specifications, schematics,
invoices, checks and other business records, presentation graphics, photos,
audio and video clips and facsimile documents. A substantial portion of
corporate data is unstructured. Unstructured data is commonly contained in large
object files which are often referred to as a "binary large object," which files
can create network efficiency problems for organizations that collaborate
electronically either on local area networks ("LANs"), wide area networks
("WANs"), or over the web (e-commerce). Network traffic and bandwidth
limitations have historically been, and continue to be, one of the major
constraints on the deployment of enterprise-wide document management solutions.
Without the resolution of bandwidth limitations, enterprise-wide document
management systems often provide poor response time to users or limit the
maximum number of simultaneous users supported by a network system. Awaiting the
availability of bigger bandwidth is not a solution, as the demand for bandwidth
continues to increase as users begin to utilize increasingly complex data types
such as pictures, audio and video clips.
Whatever the format and wherever the location, unstructured data
represents information which is essential to a company's business and which
forms a key part of a company's intellectual capital. In today's competitive
marketplace, companies need the ability to leverage their intellectual capital;
however, limitations on a company's ability to access, process and communicate
this information has restrained the productivity of businesses at both the
individual and team levels. Without an effective means of obtaining business
information, workers are often forced to re-create documents from scratch,
duplicating effort and increasing the margin for error. In addition,
professionals often spend a significant amount of their time locating documents
rather than engaging in higher-value activities. Additional complexity results
where documents must be accessed and revised by teams of workers dispersed
throughout an enterprise who may operate different desktop software and
computers. The lack of effective tools for communicating and sharing information
and for automating the business logic makes this process even more
time-consuming, inefficient and error-prone.
Electronic document management systems were developed to enable
customers to effectively and efficiently manage, share and distribute critical
business information. The Gartner Group, an information technologies consulting
group, has estimated that in 1998 revenues generated from software sales in the
global integrated document management market totaled $660 million.
A true EDMS solution is often viewed by organizations as part of their
information systems' re-engineering, and as a result there are several
significant issues organizations typically consider when evaluating an EDMS
solution. Such issues include scalability of the system, the ability to
integrate with existing structural databases, deployment over the web and other
applications such as document workflow and product data management ("PDM"), the
price of the system, the ability to view multiple document formats, the level
and cost of integration services required, the impact of the system on network
bandwidth, integration with existing business processes, the ability to control
document security, the ability to operate on existing computing infrastructure
and with existing applications, the system architecture and the ability to
handle large and complex data types and to customize the product to the client's
particular needs. In
3
addition, organizations also consider user related issues such as the ability to
search, retrieve, view, annotate and edit data in a controlled manner.
THE ALTRIS SOFTWARE SOLUTION
The Company's suite of three-tier, document management software
products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The Company's suite of products provides several key business benefits,
including those described below:
INTEROPERABILITY/ENTERPRISE SCALABILITY. The Company's suite of
products operates on most common hardware, software, network and database
platforms, including Microsoft Windows 95-TM- and 98-TM-, Windows NT-TM- and
UNIX operating systems for the database component and Oracle and Microsoft
database platforms. In addition, the Company's products are designed for
enterprise-wide scalability so that organizations can deploy solutions that not
only meet the needs of departments but also scale to an entire enterprise with
multiple divisions and thousands of users worldwide.
EXTENSIVE FUNCTIONALITY. The document management and library functions
of the Company's products allow businesses to store, organize and manage both
simple and complex documents within their organizations. Users can find and
access information through full or partial field searches or full text searches
by keyword or by a combination of words. The Company's products provide
extensive computerized controls designed to permit only authorized users to
access information. In addition to the document management and library
functions, the Company's products also include powerful tools enabling users to
make comments, annotations and redline overlays on documents on-line without
changing the underlying information, thus replacing traditional markups on paper
documents and streamlining the review process. The Company's products integrate
with existing e-mail systems and run in conjunction with popular Internet Web
Browsers such as Microsoft Internet Explorer.
ABILITY TO BE TAILORED. The Company's embedded application programming
interfaces ("APIs") simplify tailoring by both users and application developers,
thereby enabling customers to effectively customize and integrate applications
with existing information infrastructure. The Company's Toolkits include APIs
for document viewing, scanning, markup, editing, and printing, plus manipulating
data in document databases.
FASTER, MORE COST-EFFECTIVE IMPLEMENTATION. The Company provides a
complete EDMS solution which includes its own multi-format document manager that
allows users to view, annotate and edit a variety of different types of
documents, while also providing a look and feel consistent with the Company's
products. As a result, the Company believes that the overall cost of
implementing its EDMS solution is significantly lower than competitive systems
in the marketplace, which typically require the customized integration of
viewing, annotation and editing products from disparate software producers.
IMPROVE NETWORK EFFICIENCY. The Company's TIE-Technology substantially
reduces network traffic, decreases the time it takes to access and view
documents and increases the maximum number of simultaneous users supported by a
network system, technology which the Company believes provides it with a
significant competitive advantage.
DOCUMENT-ENABLE EXISTING APPLICATIONS. The Company's
"document-enabling" software allows users to integrate the power of electronic
document management directly into a user's business applications, providing
users with greater access to information from which to make business decisions
and extending the life of these business applications. The Company's
document-enabling software has been integrated with a number of leading PDM,
manufacturing and accounting software systems.
STRATEGY
The Company's strategy includes the following key elements:
EXTEND TECHNOLOGY LEADERSHIP. The Company continually seeks to extend
its position as a technology leader in developing and marketing document
management solutions. The Company intends to do this by (i) continuing to
enhance the features and functionality of its current products, including by
adding
4
and enhancing tools that allow users to customize the graphical user interfaces
("GUIs"), layout and menu items to fit their own needs; (ii) designing
additional APIs to simplify tailoring by both users and application developers;
(iii) providing users with administrative tools that enable systems operators to
monitor individual use, network traffic and printing volume; (iv) enhancing the
API's to operate more seamlessly across internet infrastructures.
In March 1999, the Company released its Altris eB-Registered Trademark-
product which is built on a three-tier architecture, allowing users to choose
between "thin" and "thick" client models on the desktop (including
Internet/intranet) and to deploy process and data servers more efficiently. (A
"thin" client model uses a client/server architecture with most of the
applications stored on the server rather than on the client, while a "thick"
client model stores most of the applications on the client rather than the
server.) Altris eB-Registered Trademark- is designed to provide a wide range of
tools for information exchange and review, system administration, configuration
and tailoring plus desktop tools for easy modification of the look-and-feel and
extension of functionality. Altris eB-Registered Trademark- will support common
enterprise tools such as Microsoft Office-TM-, BackOffice-TM- And
MS-Exchange-TM-.
FOCUS DIRECT SELLING EFFORTS ON SELECT VERTICAL MARKETS. The Company
focuses its direct sales force on select vertical markets with compelling
business needs for the Company's document management solutions. The Company has
established a strong market presence in the utility, manufacturing,
transportation and petrochemical and other processing industries both
domestically and internationally. The Company intends to continue its direct
sales and marketing force to increase its market penetration in these industries
as well as in certain other select vertical markets, including telecommunication
providers, defense and other governmental agencies, electrical and electronic
equipment manufacturers, engineering and construction firms, financial
institutions, property management companies and architecture firms.
EXPAND INDIRECT DISTRIBUTION CHANNELS. The Company intends to continue
to build and develop its existing VAR, systems integrator and OEM channels which
are targeted primarily at industries not covered by its direct sales force in
order to reach the broadest customer base. The Company is expanding its VAR and
systems integrator channel by increasing training and support programs,
developing additional software tools to facilitate configuration and recruiting
additional VARs and systems integrators in key geographical and vertical
markets. The Company's former United Kingdom based subsidiary, ASL, serves as a
primary VAR for sales and distribution of the Company's products outside of the
U.S., Canada, Mexico and South America. This organization, now know as Spescom
U.K., has an exclusive distribution agreement for the Company's products through
the year 2001. After 2001, the exclusivity is only retained provided certain
revenue targets are achieved.
PROVIDE COMPLETE SOLUTIONS. The Company intends to continue to provide
(i) complete EDMS solutions which include the Company's multi-format document
manager; (ii) an extensive range of product tools and features that are
interoperable and scalable across an enterprise and that can be rapidly deployed
at relatively low cost; and (iii) greater network efficiencies than competitive
products. The Company has a comprehensive service and support organization that
is designed to ensure both international and domestic customers' successful
implementation and use of its suite of products. The Company believes its
customers' success in implementing and using the Company's products is critical
to sustaining references and repeat sales from its customer base.
CUSTOMERS
The following are examples of customers who are using the Company's
products:
UTILITIES. Within the utilities industry, countless documents relating
to plant management, facility maintenance and support, transmittal processing
and tracking, matrix security and statutory compliance must be current and
readily available at all times. Furthermore, with pending deregulation,
utilities are under increasing pressure to minimize their costs. The Company has
installed document management solutions at more than 25 utilities around the
world. In one example, a commercial utility was relying on more than 2,000,000
microfilm documents, 750,000 paper documents and 110,000 aperture cards (a form
of microfilm technology) for its daily operations. Beginning in the engineering
department, the Company added a document management solution containing its
TIE-Technology which transformed the paper system into an integrated part of the
utility's existing applications, including its work flow applications. The
utility purchased a license for an enterprise-wide deployment covering 2,000
individual users. The Company's solution
5
enables all current and historic plant records, including those generated by
word processors and spreadsheet programs, to be readily available throughout the
utility.
TRANSPORTATION. In the rail transportation segment, countless documents
relating to scheduling, structures, track and signaling must be current and
readily available at all times. For example, one of the world's oldest and
largest public transportation systems had more than 3,000,000 maintenance and
safety documents stored on aperture cards and microfiche, and manual handling
processes were straining efficient operation. The Company's document management
solution and TIE-Technology now enables users quick access to all documents
on-line, including the documents described above as well as accounts payable and
invoice records, internal letters and memoranda and other business records, with
additional search, optical character recognition ("OCR") and E-mail
functionality. Today, the system can be accessed and operated by over 1,500
individual users who can retrieve critical business information whenever
necessary on a near-instantaneous basis, thereby enabling this public
transportation system to better ensure regulatory compliance.
MANUFACTURING. One of the world's largest manufacturers of earth-moving
and construction equipment has a vast network of independent dealers in over 128
countries. With product information contained in more than 4,200,000 engineering
drawings, CAD files, manufacturing documents and aperture cards, dealers
providing customer service in these countries were often forced to wait for the
results of lengthy searches and incurred costly delivery charges. The Company
supplied this manufacturer with a document management solution for storing and
retrieving the millions of pages of product information. Today, over 15,000
users perform more than 20,000 views and prints per day at locations around the
world with information requests filled in seconds rather than days.
PETROCHEMICAL. In the highly regulated petrochemical industry,
companies must have the ability to quickly access critical information for
safety, maintenance and regulatory compliance purposes. One of the world's
largest petrochemical companies operates oil platforms in the North Sea from its
principal facilities in Scotland and Norway. Large engineering drawings,
detailed schematics, maintenance instructions and other intricate documentation
often had to be delivered by boat or helicopter, creating substantial delays. By
using the Company's TIE-Technology, this customer was able to transmit documents
to its oil platforms directly by satellite. As a result of the success of the
system, the Company was asked to install document management software at three
other sites. The resulting document management solution currently has thousands
of individual users worldwide and manages all forms of documents, including
paper-based documents, business applications and CAD created documents.
SALES AND MARKETING
DIRECT SALES
The Company focuses its direct sales force on select vertical markets
with compelling business needs for the Company's document management solution.
The Company has established a strong market presence in the utility,
manufacturing, transportation and petrochemical and other processing industries
both domestically and internationally. The Company's strategy is to continue its
direct sales and marketing to increase its market penetration in these
industries as well as in certain other select vertical markets, including
telecommunication providers, defense and other governmental agencies, electrical
and electronic equipment manufacturers, engineering and construction firms,
financial institutions, property management companies and architecture firms.
A key part of the Company's direct sales efforts are focused on
upgrading existing customers to the new eB-Registered Trademark- product.
Existing customers who currently have maintenance contacts for the Company's
products receive a "like for like" free license upgrade to eB-Registered
Trademark-. Additional license and service revenue is available for expansion
and conversion to these systems.
As of February 10, 2000, the Company's sales and marketing organization
consisted of 7 employees all based in the U.S. The Company's field sales force
regularly conducts presentations and demonstrations of the Company's suite of
products to management and users at customer sites as part of the direct sales
effort. Sales cycles for the Company's products generally last from six to
twelve months.
6
INDIRECT DISTRIBUTION CHANNELS
Although the Company has historically generated the majority of its
revenues from its direct sales force, the Company has also established a network
of third-party VARs, system integrators and OEMs who build and sell systems
(with components or complete systems provided by the Company) that address
specific customer needs within various vertical markets, including those
targeted directly by the Company. Sales through indirect channels accounted for
12%, 12% and 18% of the Company's total revenue for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company's strategy is to build and develop its existing VAR,
systems integrator and OEM channels which are primarily targeted at the
industries and geographic regions not covered by its direct sales force in order
to reach the broadest customer base. The VARs and systems integrators are an
integral part of the Company's distribution strategy as they are responsible for
identifying potential end-users, selling the Company's products to end-users as
part of a complete hardware and software solution, customizing and integrating
the Company's products at the end-user's site and supporting the end-user
following the sale. Additionally, the Company intends to focus increased effort
on growing its VAR and systems integrator channel through increasing training
and support programs, developing additional software tools to facilitate
configuration and recruiting additional VARs and systems integrators in key
geographical and vertical markets.
Set forth below are several of the VARs, systems integrators and OEMs
with whom the Company has entered into cooperative sales arrangements:
Adepso Prisma Imaging
Alpha Numeric Solutions QSP Financial Information Systems
CACI Information Systems SAIC
CAD Capture SMARTtech
Data General Spescom U.K.
Datel Group Spescom South Africa
Excitech Computers Staffware
GE Capital Consulting
There can be no assurance that any customer, VAR, systems integrator or
OEM will continue to purchase the Company's products. The failure by the Company
to maintain its existing relationships, or to establish new relationships in the
future, could have a material adverse effect on the Company's business, results
of operations and financial condition.
MARKETING COMMUNICATIONS
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, channel marketing,
promotions, seminars, trade shows, web site, telemarketing and ongoing customer
and third-party communications programs. The Company also seeks to stimulate
interest in its products through public relations, speaking engagements, white
papers, technical notes and programs targeted at educating consultants about the
capabilities of the Company and its products.
SERVICES AND SUPPORT
The Company believes that a high level of services and support are
critical to its performance. As a result, the Company maintains a telephone
hotline to provide technical assistance and software support directly to its
end-users on an as-needed basis. The Company also provides technical support,
maintenance, training and consulting to its VARs, systems integrators and OEMs,
which in turn provide technical support services directly to end-users. These
services are designed to increase end-user satisfaction, provide feedback to the
Company as to end-users' demands and requirements and generate recurring
revenue. The Company plans to continue to expand its support programs as the
depth and breadth of the products offered by the Company increase.
7
VAR, SYSTEMS INTEGRATORS AND OEM SUPPORT
The Company employs pre-sales, technical support personnel that work
directly with VARs, systems integrators and OEMs to provide responses to
technical sales inquiries. The Company also offers educational and training
programs, as well as customized consulting services to its VARs, systems
integrators and OEMs. Fees for training and consulting services are generally
charged on a per diem basis. The Company also provides product information
bulletins on an ongoing basis, including bulletins posted through its Internet
web site and through periodic informational updates about the products
installed. These bulletins generally answer commonly asked questions and provide
information about new product features.
TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company, in conjunction with its VARs and systems integrators,
offers end-users a software maintenance program that includes software updates
provided by the Company to end-users and technical support provided by the VARs
and systems integrators. Telephone consultation is provided by the Company to
VARs and systems integrators to respond to end-user questions that VARs and
systems integrators are unable to answer. VARs and systems integrators typically
charge end-users a fee for maintenance and support of the entire EDMS and
imaging system, including software and hardware. In turn, the Company charges
VARs and systems integrators an annual fee based upon a percentage of the
then-current list prices of the licensed software.
WARRANTY
The Company generally includes a 90-day limited warranty with software
licenses. During the warranty period, end-users are entitled to corrections for
documented program errors. The services provided during the warranty period may
be extended by the end-user entering into the Company's software maintenance
program.
PRODUCTS
The Company's suite of multi-tier, document management software
products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The underlying architecture for the Company's EDMS employs a model
designed to ensure scalability, modularity and high performance. The Company's
suite of products are grouped into three main categories, which are Core
Document Services, Client Interfaces and Toolkits.
CORE DOCUMENT SERVICES
The Company's EDMS Server, which is the central component of the
document management system, provides document capture, storage, distribution,
version control, check-in/check-out, process and transaction management. The
EDMS Server manages documents of all types, including CAD, image, multi-media
and text, as well as compound or virtual documents consisting of multiple
document types and documents that are edited in one format and distributed in
another (for example, editing a CAD application and distributing in an image
format, or editing in Microsoft Office-TM- and distributing in a printed
document format). Some examples of core document services include:
- CAPTURE: Documents are loaded individually or in batches and
moved through a process which includes quality control,
indexing and storage. Multiple indexing options are provided,
including indexing by structured fields, keywords or full
text. For documents residing in hardcopy format, an
intermediate recognition step is performed by optical
character recognition ("OCR") to create searchable ASCII text.
In addition, integrated Computer Output to Laser Disc ("COLD")
technology provides the ability to capture structured data and
retain and present it in report format, allowing searches
against the reports.
- LIBRARY SERVICES: The EDMS Server provides comprehensive
library functions, including storage, management,
distribution, routing, check-in/check-out, version control and
change management. Documents of all formats are managed in a
secure environment which can provide distribution to
authorized users at remote sites. The EDMS Server permits
storage to a wide variety of media, including CD-ROM, magnetic
disk, optical disks and a redundant array of inexpensive disks
8
("RAID") and uses caching and other functions to enhance
performance. The EDMS Server enables the secure
check-in/check-out of documents for editing, routing for
comment or approval and management of the revision history.
- IMAGE MANAGEMENT: Image is an important data type in any EDMS
solution. The EDMS Server architecture is designed for both
simple and complex image management. The Company's
multi-format document manager allows users to view, annotate
and edit a variety of different types of documents, while also
providing a look and feel consistent with the Company's
products. In addition, to address network traffic limitations,
the Company's TIE-Technology allows monochrome images (in
industry and international standard formats) to be displayed
with only about 5-10% of the network traffic of many competing
products. This performance is achieved across most popular
network types.
- DISTRIBUTION: Documents can be distributed in hard copy
through a printer, plotter or fax machine. The output can be
tagged with information such as the date and time, the
identity of the requestor and a standard warning label. The
output is automatically rotated and scaled for optimum fit to
paper. Documents can also be distributed on-line over LANs,
WANs and the Internet, thereby facilitating annotating,
redlining and editing. Additionally, documents can be
distributed through a wide variety of other media, including
CD-ROM, magnetic disk, optical disks and RAID. To address
network traffic limitations, the Company has developed its
TIE-Technology which displays documents at significantly
faster rates than competing products.
CLIENT INTERFACES
The Company offers a variety of system GUIs to allow users to obtain
the most desirable combination of functionality and style. Key system interfaces
include:
- ALTRIS EB-Registered Trademark- The Company's Altris
eB-Registered Trademark- product is designed for office and
technical and engineering environments and provides a
graphical interface to the EDMS Server, enabling users to
search for, display and route documents. In addition, as
optional added features, Altris eB-Registered Trademark- can
enable users to add documents and access such functions as
graphical work-flow and full text search.
- INTERNET/INTRANET. In many companies, the Internet and
Intranet are becoming extremely popular as an interface for
the general user population. The Company's products integrate
with existing e-mail systems and also run in conjunction with
popular internet web browsers such as Microsoft Internet
Explorer-TM-, allowing users to search and display documents
through the Internet and Intranet with minimal client-side
software.
- DOCUMENT-ENABLED APPLICATIONS. The Company's
"document-enabling" software allows users to integrate the
power of electronic document management imaging directly into
a user's business applications, providing users with greater
access to information from which to make business decisions
and extending the life of these business applications. The
Company's document enabling software has been integrated with
a number of leading PDM, workflow and accounting software
systems.
- MULTI-FORMAT DOCUMENT MANAGER. The Company's multi-format
document manager allows users to view, annotate and edit a
variety of different types of documents, while also providing
a look and feel consistent with the Company's products. More
than 100 document formats are supported. By employing
TIE-Technology, the Company believes its products deliver
superior display performance without significant impact on the
network.
- CAD CONNECT The Company's CAD Connect manages the creation of
complex engineering drawings using popular CAD software such
as AutoCAD. CAD Connect provides the CAD engineer with rapid
access to the correct version of drawings and all of the
reference drawings that are used to build compound documents.
9
The Company continues to sell its prior document management products,
Target and Pro EDM for the office and technical engineering markets,
respectively; however, such sales are primarily for customers' expansion of
existing systems.
TOOLKIT
The Company's customers generally have unique needs for their document
management systems and associated user interfaces. To address these needs, the
Company provides embedded APIs within the eB-Registered Trademark- Business
Objects product to simplify tailoring by both users and application developers,
thereby enabling customers to effectively customize and integrate applications
with existing information infrastructure. The Company's toolkits include APIs
for document viewing, scanning, markup, raster editing and printing, as well as
APIs for manipulating data in document databases. The Company also offers
toolkits that provide customers with the ability to document-enable applications
built with C/C++, Powerbuilder and Visual BASIC, as well as existing, legacy
UNIX, mini or mainframe applications.
The Company's desktop products run on Microsoft Windows 95-TM-, 98-TM-
and Windows NT-TM- operating systems, and its EDMS Application Server runs on
Windows NT and supports databases and file servers on a range of server hardware
including a variety of UNIX platforms such as Hewlett-Packard, IBM and Sun, as
well as Microsoft Windows NT. The system operates in conjunction with
industry-standard RDBMS including Oracle and Microsoft Sequel Server. The system
also embeds leading full-text search technologies from Fulcrum, and connects to
leading e-mail packages such as Microsoft Exchange and Lotus Notes.
Pricing for the Company's systems can vary substantially based upon the
particular features of the system and peripheral-device content (e.g., scanners,
printers, workstations, etc.). While pilot systems begin at a price of
approximately $15,000 for a small office system, the price of full scale
enterprise systems can range up to several million dollars. In the past, most
systems ordered from the Company have ranged from $150,000 to $1,500,000. Once
an electronic document management system is installed, the Company generally
receives ongoing revenues from follow-on contracts as a result of enhancements,
expansion and maintenance. Enhancements can modify a system in order to, among
other things, accommodate more documents or users, interface with different
peripheral devices, update the system with recently developed improvements
(including improvements which increase the speed of the system) or implement
other changes in response to changes in the customer's general data processing
environment. Variations in both the size and timing of orders can result in
significant fluctuations in the Company's revenues on a quarterly basis.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on providing
customers with the most technologically advanced solutions for their document
management needs. The Company believes that the marketplace is rapidly moving
toward demanding that all corporate information, both structured and
unstructured, simple and complex, be managed as a consistent and interconnected
global enterprise network. This trend demands that products and services work
across technology platforms, across the web, business processes and geographic
locations to establish real-time document management systems with imaging
capabilities. The need to manage global enterprise networks encompasses many
different forms of information, including small and large documents and other
complex information objects (x-rays, photos, color JPEG files, etc.). The
Company has responded to this market evolution by developing new approaches to
deal with the problem of accessing very large documents or information objects
over WANs, LANs, and the web and intends to continue to devote research and
development activity to this area.
The Company intends to continue to extend its position as a technology
leader in developing and marketing document management solutions that include
imaging capability. The Company intends to do this by continuing to enhance the
features and functionality of its current products, including tools to allow
users to customize the GUIs, designing additional APIs to simplify tailoring by
both users and application developers, administrative tools to enable systems
operators to monitor individual use, network traffic and printing volume and add
more tightly integrate, full text search, Computer Output to Laser Disc (COLD)
and Configuration Management (CM) applications. Through the enhanced integration
with CM the Company's products can provide greater management for copy control,
effect analysis of changed documents and engineering change control. Through
leveraging its technology, the Company also plans to introduce new
10
products and product extensions which are complementary to its existing suite of
products and which address both existing and emerging market needs.
In 1999, 1998 and 1997, the Company's research and product development
expenses were approximately $3,137,000, $2,314,000 and $4,155,000, respectively.
Development is also conducted within the scope of a customer contract if a
customer requires additional functionality not provided by the Company's present
systems.
In 1999, the Company continued its work to reengineer the initial
release of Altris eB-Registered Trademark-. Version 11 of eB-Registered
Trademark- is the result of that reengineering and was launched at the Altris
Accent International User Group in January and began shipping in early March
1999. The Company intends to focus its development effort on enhancing Altris
eB-Registered Trademark- with new features such as extended web functionality.
The Company also intends to add records management capabilities to Altris
eB-Registered Trademark- to provide archive and retention policies for customers
such as nuclear power plants and other regulated industries. The Company plans
to develop specific applications for the vertical markets on which the Company
has focused. The Company believes that the modular and open nature of Altris
eB-Registered Trademark- provides an excellent platform for these market
applications. Altris is a member of the Microsoft Developer Network (MSDN) which
allows the Company to properly plan for support for Microsoft Windows 2000-TM-
and Office 2000-TM-.
The Company offers Altris eB-Registered Trademark- as an upgrade for
customers under maintenance contracts. The Company charges separately for any
installation or integration costs. See "Item 1. Business--Strategy" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Operating Expenses."
There can be no assurance that the Altris eB-Registered Trademark-
product will receive market acceptance. The Company's product development
efforts with respect to Altris eB-Registered Trademark- are expected to continue
to require substantial investments by the Company, and there can be no assurance
that the Company will have sufficient resources to make the necessary
investments. The Company has experienced product development delays in the past,
and may experience delays in the future. Lack of market acceptance of the
Company's Altris eB-Registered Trademark- product, or failure to accurately
anticipate customer demand and meet customer performance requirements could have
a material adverse effect on the Company's results of operations and financial
condition.
COMPETITION
The market for the Company's products is intensely competitive, subject
to rapid change and significantly affected by new product introduction and other
market activities of industry participants. The Company currently encounters
direct competition from a number of public and private companies such as
Documentum, Inc., FileNet Corporation, OpenText and PC DOCS. Many of these
direct competitors have significantly greater financial, technical, marketing
and other resources than the Company. The Company also expects that direct
competition will increase as a result of recent consolidation in the software
industry.
The Company also faces indirect competition from systems integrators
and VARs. The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as for recommendation of its products to potential purchasers. Although the
Company seeks to maintain close relationships with these service providers, many
of these third parties have similar, and often more established, relationships
with the Company's principal competitors. If the Company is unable to develop
and retain effective, long-term relationships with these third parties, the
Company's competitive position would be materially and adversely affected.
Further, there can be no assurance that these third parties will not market
software products in competition with the Company in the future or will not
otherwise reduce or discontinue their relationship with, or support of, the
Company and its products. In addition, RDBMS vendors, such as Oracle and Sybase,
and other software developers such as Microsoft, may compete with the Company in
the future. Like the Company's current competitors, many of these companies have
longer operating histories, significantly greater resources and name recognition
and a larger installed base of customers than the Company.
The Company believes that the principal competitive factors affecting
its market include system features such as scalability of the system, the
ability to integrate with existing structural databases and other applications
such as document workflow and PDM, the ability to provide image management
capability, the price of the system, the level and cost of integration required,
the impact of the system on network
11
bandwidth, integration with existing business processes, the ability to operate
on existing computing infrastructure and with existing applications, the system
architecture and the ability to handle large and complex data types and to
customize products to the client's needs. In addition, organizations also
consider features such as the ability to search, retrieve, view, annotate and
edit data in a controlled manner. Although the Company believes that it
currently competes favorably with respect to the factors referenced above, there
can be no assurance that the Company can maintain its competitive position
against current and any potential competitors, especially those with greater
financial, marketing, service, support, technical and other resources than the
Company. In addition, the Company's significant losses and customer uncertainty
regarding the Company's financial condition are likely to have a material
adverse effect on the Company's ability to sell its products in the future
against competition.
PRODUCT BACKLOG AND CURRENT CONTRACTS
The Company's contract backlog consists of the aggregate anticipated
revenues remaining to be earned at a given time from the uncompleted portions of
its existing contracts. It does not include revenues that may be earned if
customers exercise options to make additional purchases. At December 31, 1999,
the Company's contract backlog was $4,519,000, as compared to $7,491,000 at
December 31, 1998. The Company expects $3,277,000 of the December 31, 1999
backlog to be completed in 2000, as compared to $5,303,000, of the December 31,
1998 backlog which the Company then expected to complete in 1998. The amount of
contract backlog is not necessarily indicative of future contract revenues
because short-term contracts, modifications to or terminations of present
contracts and production delays can provide additional revenues or reduce
anticipated revenues. The Company's backlog is typically subject to large
variations from time to time when new contracts are awarded. Consequently, it is
difficult to make meaningful comparisons of backlog.
The Company's contracts with its customers generally contain provisions
permitting termination at any time at the convenience of the customer (or the
U.S. Government if the Company is awarded a subcontract under a prime contract
with the U.S. Government), upon payment of costs incurred plus a reasonable
profit on the goods and services provided prior to termination. To the extent
the Company deals directly or through prime contractors with the U.S. Government
or other governmental sources, it is subject to the business risk of changes in
governmental appropriations. In order to reduce the risks inherent in competing
for business with the U.S. Government, the Company has directed its government
contracts marketing efforts toward teaming with large corporations, who
typically have existing government contracts, can alleviate the cash flow
burdens often imposed by government contracts and have more extensive experience
in and resources for administering government contracts. The Company does not
have any contractual arrangements regarding such joint marketing efforts. In the
past, such efforts have been pursued when deemed appropriate by the Company and
such corporations in response to opportunities for jointly providing systems or
services to potential government agency customers.
PATENTS AND TECHNOLOGY
The Company's success is dependent in part upon proprietary technology.
The Company owns certain U.S. and foreign patents covering certain aspects of
its document management systems technology including two patents concerning the
technology used to present the raster data to the view, markup or edit user very
quickly which involve data storage/transmission and scaling algorithms which
utilize industry standards. The Company also owns a patent on technology to
allow edit users to make changes to documents without having to specify whether
they are working on raster or vector data and a patent for a revisory capability
that allows users to modify and store drawing changes in raster and vector
format for subsequent review of the original document and each sequential
revision. There can be no assurance that the Company's patents will be found
valid if challenged or, if valid, will provide meaningful protection against
competition. While the Company believes that the protection afforded by its
patents will have value, the rapidly changing technology in the industry makes
the Company's success largely dependent on the technical competence and creative
skills of its personnel.
The Company also relies on a combination of trade secret, copyright and
non-disclosure agreements to protect its proprietary rights in its software and
technology. There can be no assurance that such measures are or will be adequate
to protect the Company's proprietary technology. Furthermore, there can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
12
The Company's software is licensed to customers under license
agreements containing provisions prohibiting the unauthorized use, copying and
transfer of the licensed program. Policing unauthorized use of the Company's
products is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, any significant piracy of its
products could materially and adversely affect the Company's financial condition
and result of operations. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States and there can be no assurance that the Company's means of
protecting its proprietary rights will be adequate.
In addition, the Company also relies on certain software that it
licenses from third parties, including software that is integrated with
internally developed software and used in the Company's products to perform key
functions. There can be no assurances that the developers of such software will
remain in business, that they will continue to support their products or that
their products will otherwise continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain any of these
software licenses could result in delays or reductions in product shipments
until equivalent software can be developed, identified, licensed and integrated,
which could adversely affect the Company's business, operating results and
financial condition.
The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
current or future products. The Company expects that software product developers
will increasingly be subject to infringement claims. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
EMPLOYEES
As of February 10, 2000, the Company had 49 full-time employees, of
whom 19 were engaged in product development, 16 in customer support,
implementation and application engineering activities, 7 in sales and marketing
and 7 in administration. The Company also utilizes consultants for specific
projects. None of the Company's employees is represented by a labor union. The
Company has not experienced work stoppages and believes its relationship with
its employees is good. Competition for qualified personnel in the industry in
which the Company competes is intense and the Company expects that such
competition will continue for the foreseeable future. The Company has an
incentive stock option plan for granting options to employees as a means of
attracting and keeping key individuals. The Company believes that its future
success will depend, in large measure, on its ability to continue to attract,
hire and retain qualified employees and consultants.
ITEM 2. PROPERTIES
The Company's headquarters are located in San Diego, California. The
Company leases 31,016 square feet of a 40,000 square foot building in San Diego.
The term of the lease is through March 2001, at a monthly rent of $17,059, with
annual increases of approximately 4%.
In October 1996, the Company closed its engineering and sales office in
Camarillo, California, approximately 50 miles northwest of Los Angeles. The
facility is currently subleased. The lease covers 19,400 square feet of a 40,000
square foot building. The term of the lease is through April 2001. The monthly
rent is $20,246, which includes operating expenses, and is subject to annual
adjustments not to exceed 4% in any year.
The Company also leases a facility in Florida under a lease which
expires in March 2002. The monthly rent is $5,444. The facility is currently
subleased at the same rent.
See Note 11 of the Notes to the Consolidated Financial Statements for
further information regarding the Company's lease commitments.
13
ITEM 3. LEGAL PROCEEDINGS
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company and dismissed the lawsuits with prejudice.
The settlement provides for the dismissal and release of all claims in these
cases in exchange for (a) payment of $2,500,000 by the Company's insurance
carrier to the class of plaintiffs, (b) issuance by the Company of 2,304,271
shares of its common stock to the plaintiffs, which is equal to twenty percent
of the sum of (i) the number of shares of common stock currently outstanding and
(ii) the maximum number of shares issuable upon conversion of the Series E
Preferred Stock, and (c) cooperation by the Company with plaintiffs' counsel by
providing certain documents and information regarding the claims asserted in the
class actions. The Company recorded expense of $1,128,000 in connection with
this settlement in 1998 based on the average closing market price the week
preceding the execution of the memorandum of understanding for the settlement
times the number of shares of the Company's common stock to be issued in the
settlement.
In addition, as a part of the settlement in these class actions, the
Company's former Chairman of the Board, President, and Chief Executive Officer,
Jay V. Tanna, has agreed to forego any claim for unpaid compensation of $131,000
under the Separation Agreement and Release of Claims that Mr. Tanna and the
Company entered into on April 1, 1998, and to surrender his 35,000 shares of
common stock in the Company. Mr. Tanna and the Company also have entered into a
Settlement Agreement and Mutual Release resolving all claims and disputes with
one another, with the exception of certain existing indemnification obligations
under Altris' bylaws, California law, and the indemnity agreement between the
Company and Mr. Tanna related to his services as a director and officer of the
Company.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held October 28, 1999. At the
meeting, the shareholders approved a proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock from
20,000,000 to 30,000,000 shares. The proposal was approved with 7,741,803
proxies voting for, 334,401voting against, and 39,485 abstaining. The
shareholders also approved a proposal to amend the Company's 1996 Stock
Incentive Plan to increase the aggregate number of shares of Common Stock
reserved for issuance from 925,000 to 1,425,000 shares. The proposal was
approved with 7,661,723 proxies voting for, 405,355 voting against, and 48,611
abstaining.
In addition, at the meeting, the shareholders approved the election of
the following individuals as directors to hold office until the next annual
meeting.
Director Votes For Votes Withheld
-------- --------- --------------
Roger H. Erickson 8,038,230 125,858
D. Ross Hamilton 8,038,942 125,196
Michael J. McGovern 7,998,942 165,196
Larry D. Unruh 7,999,092 165,046
Martin P. Atkinson 7,998,942 165,196
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded on the Nasdaq National Market
through March 11, 1998 when trading was suspended by the Nasdaq Stock Market.
The Company was delisted from the Nasdaq National Market as a result of not
meeting certain listing requirements. The Company now trades on the OTC Bulletin
Board under the symbol "ALTS." The following table shows, for the calendar
quarters indicated, the high and low sale prices of the Common Stock:
YEAR ENDED DECEMBER 31, 1997 High Low
---- ---
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $8.25 $4.50
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 6.75 3.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 9.75 5.69
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 8.19 2.75
YEAR ENDED DECEMBER 31, 1998
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $3.00 $1.44
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 1.00 0.37
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1.00 0.25
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 0.65 0.29
YEAR ENDED DECEMBER 31, 1999
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $1.59 $0.35
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 1.13 0.63
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1.00 0.30
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 1.00 0.56
On February 10, 2000, there were approximately 450 holders of record of
the Company's Common Stock and the last sale price of the Common Stock as
reported on the OTC Bulletin Board on February 10, 2000 was $2.75 per share.
The Company has never paid a dividend on its Common Stock, and the
current policy of its Board of Directors is to retain all earnings to provide
funds for the operation and expansion of the Company's business. Consequently,
the Company does not anticipate that it will pay cash dividends on its Common
Stock in the foreseeable future.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% (Adjusted to 12% in May 1999) Subordinated
Debenture due June 27, 2002 with a principal amount of $3,000,000 (the
"Subordinated Debenture"), and warrants to purchase additional shares of Common
Stock. The aggregate gross proceeds to the Company from the private placement
before expenses were $6,000,000. In May 1999, the Company exchanged 3,000 shares
of Series E Convertible Preferred Stock (the "Series E Preferred Stock") for the
outstanding Series D Preferred Stock. The Series E Preferred stock also has an
aggregate stated value of $3,000,000. A summary of certain terms of the Series E
Preferred Stock and subordinated debenture is set forth below.
CONVERTIBLE PREFERRED STOCK. The Series E Preferred Stock bears a
dividend of 11.5% per annum, accruing quarterly, and is convertible into shares
of the Company's common stock at a conversion price of $1.90 per share . The
Company may redeem any or all of the Series E Preferred Stock at its stated
value on or after June 27, 1999 at any time the 20-day average of the closing
price of the common stock equals or exceeds $9.50 per share, and the Company may
redeem any or all of the Series E Preferred Stock on or after June 27, 2002 at
its stated value irrespective of the trading price of its common stock. If an
event of
15
default exists under the purchase agreement governing the issuance of the Series
D Preferred Stock, as amended to provide for the exchange of Series D Preferred
Stock for Series E Preferred Stock (the "Preferred Stock Purchase Agreement"),
then the dividend rate increases to 14% per annum until such time as the event
of default is cured. In addition, if the Company fails to pay dividends on six
consecutive dividend payment dates, or the aggregate amount of unpaid dividends
equals or exceeds $172.50 per share, then the Investor shall be entitled to
nominate an additional director to the Company's board. As the Company is
currently in default under the Preferred Stock Purchase Agreement as a result of
non-payment of dividends due in 1998 and 1999, the dividend rate on the Series E
Preferred Stock has increased to 14%. In 1998, dividends of $87,000 were paid on
the Series D Preferred Stock and as of December 31, 1999 accumulated unpaid
dividends amounted to $770,000. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Factors That May Affect Future Results."
SUBORDINATED DEBENTURE. The Subordinated Debenture, which was issued at
100% of par, provides for quarterly interest payments with a maturity date of
June 27, 2002. The Company may prepay the Subordinated Debenture prior to
maturity without penalty. In November 1998, the Company entered into a Security
Agreement with the Investor providing the Investor with a second priority
security interest in substantially all the assets of the Company. The Investor's
security interest is subordinated to the first priority security interest of the
lender under the Company's revolving credit agreements. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Factors That May Affect Future
Results."
WARRANTS AND CONTINGENT WARRANTS. In connection with the issuance of
the Series D Preferred Stock, the Company has agreed to grant to the Investor
warrants to purchase the following number of shares of its common stock if the
Series E Preferred Stock remains outstanding on each of the following dates: (i)
50,000 shares, at an exercise price of $7.00 per share (adjusted to $1.90 in May
1999), on June 27, 2000 if the Series E Preferred Stock has not been redeemed or
converted in full on or prior to June 27, 2000; (ii) 50,000 shares, at an
exercise price of $7.00 per share (adjusted to $1.90 in May 1999), on June 27,
2001 if the Series E Preferred Stock has not been redeemed or converted in full
on or prior to June 27, 2001; (iii) 250,000 shares, at an exercise price equal
to the trading price per share at the issuance of the warrant, on July 17, 2002
if the Series E Preferred Stock has not been redeemed or converted in full on or
prior to July 17, 2002; and (iv) 250,000 shares, at an exercise price equal to
the trading price per share at the issuance of the warrant, on June 27, 2003 if
the Series E Preferred Stock has not been redeemed or converted in full on or
prior to June 27, 2003. In connection with the issuance of the Subordinated
Debenture, the Company granted to the Investor warrants to purchase 300,000
shares of its common stock at an exercise price of $6.00 per share (adjusted to
$1.90 in May 1999). In addition, the Company has agreed to grant to the Investor
additional warrants to purchase 50,000 shares of its common stock at an exercise
price of $7.00 per share on June 27, 2000 if the Subordinated Debenture then
remains outstanding and on each anniversary thereafter on which the Subordinated
Debenture remains outstanding. Each warrant granted to the Investor expires on
the date that is five years from the date of grant of such warrant.
ISSUABLE MAXIMUM; MANDATORY REDEMPTION. If the number of shares
issuable upon conversion of the Series E Preferred Stock, when added to all
other shares of common stock issued upon conversion of the Series E Preferred
Stock and any shares of common stock issued or issuable upon the exercise of the
warrants issued to the Investor would exceed 1,906,692 shares of common stock
(the "Issuable Maximum"), then the Company shall be obligated to effect the
conversion of only such portion of the Series E Preferred Stock resulting in the
issuance of shares of common stock up to the Issuable Maximum, and the remaining
portion of the Series E Preferred Stock shall be redeemed by the Company for
cash in accordance with the procedures set forth in the Certificate of
Determination for the Series E Preferred Stock.
REGISTRATION RIGHTS. In connection with the issuance of the Series E
Preferred Stock, the warrants to purchase 300,000 shares of common stock and the
various contingent warrants to purchase shares of common stock, the Company
granted to the Investor certain registration rights for the underlying common
stock. Such registration rights include the right, subject to certain
conditions, to demand at any time and on up to three occasions that the Company
register such underlying shares for resale.
Subject to the approval of the Company's shareholders, the Subordinated
Debenture and Series E Preferred Stock will be exchanged for 9,528,096 shares of
common stock pursuant to a Stock Purchase Agreement between the Company and
Spescom, Ltd ("Spescom)" which acquired the Subordinated Debenture and Series E
Preferred Stock from the Investor in December 1999.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company. The financial data for each of the five years in the period ended
December 31, 1999 have been derived from the audited Consolidated Financial
Statements.
The data set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Year Ended December 31,
-------------------------------------------------------------
Consolidated Statement of Operations Data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands except per share data)
Revenues $7,122 $12,803 $ 17,773 $19,549 $ 12,731
Cost of revenues 4,316 7,027 9,383 9,540 5,791
------- ------- ------- ------- -------
Gross profit 2,806 5,776 8,390 10,009 6,940
------- ----- ------- ------ -----
Operating expenses:
Research and development 3,137 2,314 4,155 3,363 1,402
Marketing and sales 1,818 4,385 8,179 5,581 3,570
General and administrative 2,582 5,083 4,241 3,077 1,581
Settlement of lawsuits - 1,128 - - -
Write off of capitalized software - 625 - - -
Write down of assets to net
realizable value - - 190 - 1,664
Charge for purchased research and
development - - - - 10,595
Loss on office closure - - - 410 -
------- ------- ------- ------- -------
7,537 13,535 16,765 12,431 18,812
------- ------- ------- ------- -------
Loss from operations (4,731) (7,759) (8,375) (2,422) (11,872)
Interest and other income 282 31 383 88 137
Interest and other expense (609) (664) (447) (114) (95)
------- ------- ------- ------- -------
Net loss $(5,058) $(8,392) $(8,439) $(2,448) $(11,830)
======== ======= ======= ======= =======
Basic net loss per common share $ (.50) $ (.92) $ (.90) $ (.26) (1.68)
======== ======= ======= ======= =======
Diluted net loss per common share $ (.50) $ (.92) $ (.90) $ (.26) $ (1.68)
======== ======= ======= ======= =======
Shares used in computing basic net loss
per common share 10,956 9,615 9,585 9,250 7,026
Shares used in computing diluted net loss
per common share 10,956 9,615 9,585 9,250 7,026
At December 31,
--------------------------------------------------------------------
Consolidated Balance Sheet Data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Working capital (deficit) $ (5,293) $ (6,509) $ (1,977) $2,064 $ 939
Long-term obligations 5,473 6,453 2,920 1,966 1,420
Mandatorily redeemable convertible
preferred stock 3,423 3,003 2,682 - -
Shareholders' (deficit) equity (9,797) (6,778) 2,048 9,863 8,116
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
When used in the following discussion, the words "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements,
including the Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of items included in the Company's Consolidated Statement of Operations
for each of the last three fiscal years:
For the year Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 60.6 54.9 52.8
------- ------- -------
Gross profit 39.4 45.1 47.2
------- ------- -------
Operating expenses:
Research and development 44.0 18.1 23.4
Marketing and sales 25.5 34.2 46.0
General and administrative 36.3 39.7 23.9
Settlement of lawsuits - 8.8 -
Write off of capitalized software - 4.9 -
Write down of assets to net realizable value - - 1.0
------- ------- -------
105.8 105.7 94.3
------- ------- -------
Loss from operations (66.4) (60.6) (47.1)
Interest and other income 4.0 .2 2.1
Interest and other expense (8.6) (5.2) (2.5)
------- ------- -------
Net loss (71.0)% (65.6)% (47.5)%
======= ======= =======
REVENUES
Revenues were $7,122,000, $12,803,000 and $17,773,000 for 1999, 1998
and 1997, respectively. The decreases in both 1999 and 1998 were due to lower
software license and services revenue. Software license revenues were $2,046,000
(29%), $4,189,000 (33%), $8,154,000 (46%) in 1999, 1998, and 1997, respectively,
while revenues from services and other revenue were $5,076,000 (71%), $8,614,000
(67%), and $9,619,000 (54%) in 1999, 1998, and 1997, respectively. A large part
of the decrease from 1998 to 1999 resulted from the sale of 60% of Altris
Software Limited (ASL), the Company's United Kingdom subsidiary. The operations
of ASL have been excluded from the consolidated results of the Company since
April 1, 1999. In addition, the Company's inability to provide the Altris
eB-Registered Trademark- product as originally planned in 1997, which was to
address the needs of new customers for additional features and functionality,
was another principal cause for the decline in software license revenue in 1999
and 1998. Also contributing to the
18
decreases in 1999 and 1998 was customers' uncertainty regarding the financial
condition of the Company. Management also believes that in 1999 the purchasing
patterns of customers and potential customers were affected by Year 2000 issues,
with many companies expending significant resources to correct their software
systems for Year 2000 compliance. These expenditures reduced funds available to
purchase software products and services such as those offered by the Company.
A small number of customers has typically accounted for a large
percentage of the Company's annual revenues. The Company's reliance on
relatively few customers could have a material adverse effect on the results of
its operations on a quarterly basis. Additionally, a significant portion of the
Company's revenues has historically been derived from the sale of systems to new
customers.
COST OF REVENUES
Gross profit as a percentage of revenues was 39%, 45% and 47% for 1999,
1998, and 1997 respectively. The decreases in both 1999 and 1998 were due to the
decrease in the gross profit for licenses as a percentage of license revenues to
43% in 1999 and 63% in 1998 from 75% in 1997. The decrease in the gross profit
margin for licenses in 1999 compared to 1998 was due principally to increased
amortization of software development costs from the Company's release of its
eB-Registered Trademark- product in 1999, while revenues decreased faster. The
decrease in gross profit margin for licenses in 1998 compared to 1997 was due
primarily to a greater proportion of revenues for 1998 related to the sale of
third-party software products which have a significantly lower gross margin than
the Company's proprietary software products as well as the late release of the
eB-Registered Trademark- software. The decrease in gross profit percentage for
license revenue was offset by improving gross profit for services and other as a
percentage of services and other revenue to 38% in 1999 and 36% in 1998 from 24%
in 1997. The increase in gross profit as a percentage of services and other
revenues in 1999 and 1998 was due to the Company reducing personnel costs
associated with consulting services and support. Cost of services and other
revenues consists primarily of personnel-related costs in providing consulting
services, training to customers and support. It also includes costs associated
with reselling third-party hardware and maintenance.
The Company's software and services are sold at a significantly higher
margin than third party products, which are resold at a lower gross profit
percentage in order for the Company to remain competitive in the marketplace.
Gross profit percentages can fluctuate annually based on the revenue mix of
Company software, services, proprietary hardware and third party software or
hardware.
OPERATING EXPENSES
Research and development expense was $3,137,000, $2,314,000, and
$4,155,000 for 1999, 1998 and 1997, respectively. Research and development
increased in 1999 from 1998 due primarily to the fact that prior to release of
the Company's eB-Registered Trademark- product in 1999, the associated
development costs were capitalized, whereas development costs in 1999 were
expensed. This increase in development expense was offset partially by a
reduction in personnel and related costs. Research and development decreased
$1,841,000 from 1997 to 1998 due in part to a reduction in personnel. Research
and development expense can vary based on the amount of engineering service
contract work required for customers versus purely internal development
projects. It may also vary based on internal development projects in which
technological feasibility and marketability of a product are established. These
costs are capitalized as incurred and then amortized when the product is
available for general release to customers. Technical expenses on
customer-funded projects are included in cost of revenues, while expenses on
internal projects are included in research and development expense. See "Item 1.
Business - Product Development".
Marketing and sales expense was $1,818,000, $4,385,000, and $8,179,000
for 1999, 1998 and 1997, respectively. A large part of the decrease from 1998 to
1999 resulted from the sale of 60% of ASL in the second quarter of 1999.
Marketing and sales expense has not included ASL's expenses since April 1, 1999.
In addition, as a result of the delay in releasing Altris eB-Registered
Trademark-, the Company reduced the number of sales and support personnel while
also reducing marketing and promotional costs. The reduction which began in 1998
was also resulted in the decrease in marketing and sales expense from 1997 to
1998.
General and administrative expense was $2,582,000, $5,083,000, and
$4,241,000 for 1999, 1998 and 1997, respectively. A large part of the decrease
from 1998 to 1999 resulted from the sale of 60% of ASL
19
in the second quarter of 1999. General and administrative expense has not
included ASL's expenses nor the amortization of goodwill relating to ASL since
April 1, 1999. The decrease from 1998 to 1999 was also in part due to decreased
legal, accounting and consultancy costs which were incurred in 1998 in
connection with the Company's restatement of its financial statements for fiscal
year 1996 and the three interim quarters in 1997. Goodwill amortization expense
increased $450,000 in 1998 from 1997 as a result of the change in the remaining
estimated useful life of the goodwill. The increase from 1997 to 1998 was
partially offset by a one-time charge in 1997 for the write off of certain
offering costs. Amortization of goodwill included in general and administrative
expense was $738,000, $1,269,000 and $853,000 in 1999, 1998 and 1997,
respectively.
On March 3, 1999 ("the settlement date"), the Company entered into a
Memorandum of Understanding providing for the settlement of certain consolidated
securities class action lawsuits pending against the Company. The Company
recorded expense of $1,128,000 in connection with this settlement in 1998 based
on the average closing market price in the week preceding the settlement date
times the number of shares of the Company's common stock to be issued in the
settlement. (See "Item 3. Legal Proceedings" and Note 12 to the Consolidated
Financial Statements.)
In the fourth quarter 1998, the Company made certain changes in the
architecture of its Altris eB-Registered Trademark- product to utilize Microsoft
Transaction Server. As a result of these changes, the Company abandoned a
certain portion of its previously developed server code and expensed the related
capitalized software costs totaling $625,000 in 1998. In 1997 the Company wrote
off $190,000 of certain software development costs related to products for which
costs were deemed to be unrecoverable due to the future product direction of the
Company.
INTEREST AND OTHER INCOME
Interest and other income was $282,000, $31,000, and $383,000 for 1999,
1998 and 1997, respectively. The increase in 1999 compared to 1998 was due to
the gain of $257,000 associated with the sale of 60% of ASL. The decrease in
1998 compared to 1997 was primarily due to interest on lower cash balances.
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $609,000, $664,000 and $447,000 for
1999, 1998 and 1997, respectively. The decrease for 1999 compared to 1998 was
due to lower interest expense as a result of the reduction of debt from normal
principal payments. Interest expense increased in 1998 compared to 1997 due to a
higher debt balance coupled with higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash and cash equivalents totaled
$142,000 as compared to $530,000 at December 31, 1998, and its current ratio was
.1 to 1. The Company has one revolving credit facility which provides for
borrowings of up to $474,000. At December 31, 1999, $474,000 was outstanding on
the revolving loan agreement with no additional funds available under the
facility.
In 1999, cash provided by investing and financing activities totaled
$193,000 and $2,061,000, respectively. In May 1999, the Company completed a
transaction with Spescom, whereby Spescom invested $1,800,000 for 2,000,000
shares of common stock. In September 1999, the Company completed a loan
transaction with Spescom providing the Company a loan of $500,000 convertible at
the option of Spescom into common stock at $0.35 per share. This loan was
converted into 1,428,571 shares of common stock in December 1999. Cash used in
operating activities totaled $2,652,000 primarily relating to the net operating
loss for 1999.
As a result of misapplications in its revenue recognition policies, the
Company, in 1998, restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. The restatement triggered events of
default under each of the Company's revolving loan agreements and under the
Subordinated Debenture. The lenders under such agreements and the Subordinated
Debenture agreed to waive such events of default. The Lender has also waived
compliance with certain financial covenants through March 15, 2000. There can be
no assurances
20
that the Company will be able to secure from its lenders a further waiver of any
events of default, including any events of default occurring after March 15,
2000 under the financial covenants of the revolving loan agreements. If such
events of default are not then waived, the Company may then be required to repay
the full amount of its outstanding indebtedness under the revolving credit
agreements and the Subordinated Debenture. Defaults in the payment of such
indebtedness or in the performance of other covenants under the agreements
related to such indebtedness, whether occurring prior to or after March 15,
2000, could also result in the Company being required to repay the full amount
of such indebtedness. The repayment of such indebtedness would require
additional debt or equity financing. There can be no assurances that any such
financing would be available.
Due to significant losses and decreasing sales, the Company reduced its
payroll cost, the largest cost element, in 1999 and 1998. In addition, the
Company has made further reductions of other expenditures. In 1999, the Company
experienced a reduction in incoming orders. The Company's ability to continue
operations is dependent upon the generation of new system sales of Altris
eB-Registered Trademark- in the near term, which cannot be assured. Given the
substantial uncertainties confronting the Company, there can be no assurance
that sufficient cash flows will be generated by the Company in the near term to
meet its current obligations. In January 2000, the Company agreed, subject to
approval by the Company's shareholders, to issue to Spescom 5,258,714 shares of
common stock for $3,700,000 and to exchange its subordinated debt and
convertible preferred stock, which are held by Spescom, along with related
accrued interest and dividends, for 9,528,096 shares of common stock (see Note
14 of the Notes to the Consolidated Financial Statements and the Company's proxy
statement, a Notice of Special Meeting of Shareholders to be held on April 14,
2000, filed March 14, 2000). Management believes that such additional cash
through the issuance of this equity is necessary to enable the Company to meet
its short-term needs for working capital. There can be no assurance that this
equity financing will be approved by the Company's shareholders or that the
other conditions for consummation of such transactions will be satisfied.
Failure to complete this financing can be expected to have a material adverse
affect on the Company's business, results of operations, and financial
condition.
NET OPERATING LOSS TAX CARRYFORWARDS
As of December 31, 1999, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $52,717,000
and $8,294,000, respectively which expires over the years 2000 through 2019. In
addition, the Company generated but has not used research and investment tax
credits for federal income tax purposes of approximately $1,150,000, which will
substantially expire in the years 2000 through 2005. Under the Internal Revenue
Code of 1986, as amended (the "Code"), the Company generally would be entitled
to reduce its future Federal income tax liabilities by carrying unused NOL
forward for a period of 15 years to offset future taxable income earned, and by
carrying unused tax credits forward for a period of 15 years to offset future
income taxes.
The Company's ability to utilize any NOL and credit carryforwards in
future years may be restricted in the event the Company undergoes an "ownership
change," generally defined as a more than 50 percentage point change of
ownership by one or more statutorily defined "5-percent stockholders" of a
corporation, as a result of future issuances or transfers of equity securities
of the Company within a three-year testing period. In the event of an ownership
change, the amount of NOL attributable to the period prior to the ownership
change that may be used to offset taxable income in any year thereafter
generally may not exceed the fair market value of the Company immediately before
the ownership change (subject to certain adjustments) multiplied by the
applicable long-term, tax-exempt rate announced by the Internal Revenue Service
in effect for the date of the ownership change. A further limitation would apply
to restrict the amount of credit carryforwards that might be used in any year
after the ownership change. As a result of these limitations, in the event of an
ownership change, the Company's ability to use its NOL and credit carryforwards
in future years may be delayed and, to the extent the carryforward amounts
cannot be fully utilized under these limitations within the carryforward
periods, these carryforwards will be lost. Accordingly, the Company may be
required to pay more Federal income taxes or to pay such taxes sooner than if
the use of its NOL and credit carryforwards were not restricted.
The Company has issued equity securities to Spescom in May 1999 and
December 1999 and through traditional stock option grants to employees over the
past three years. Although there was no
21
"ownership change" during this period, this activity increases the potential for
an "ownership change" for income tax purposes.
If the proposed share issuance to Spescom as agreed upon by the
Company's Board of Directors is approved by shareholders and consummated,
Spescom would own approximately 66% of the voting control of the Company and,
because Spescom would have acquired its entire majority interest in the Company
within one year, this would constitute an "ownership change" under the Code.
Thus, the Company's ability to use its NOL and credit carryforwards in future
years would be delayed and, to the extent the carryforward amounts could not be
fully utilized under the limitations discussed above within the carryforward
periods, these carryforwards would be lost. Accordingly, if the Company
generated net income in future years, the Company would be required to pay more
Federal income taxes or to pay such taxes sooner than if the use of its NOL and
credit carryforwards were not restricted.
In connection with the acquisition of Optigraphics, the Company
acquired Optigraphics' net operating losses which are limited to offset against
that entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
CUSTOMER CONCERN REGARDING THE COMPANY'S FINANCIAL POSITION
As a result of misapplications in its revenue recognition policies, the
Company in 1998 restated its previously presented interim financial information
and annual financial statements for 1996 and the interim information for the
first three quarters of 1997. In addition, the report of the Company's
independent accountants, Grant Thornton LLP, on the Company's Consolidated
Financial Statements as of and for the year ended December 31, 1999 includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern. See "Report of Independent Certified Public Accountants" accompanying
the Consolidated Financial Statements. The Company's restatement of its
financial statements, de-listing of the Company's Common Stock from the Nasdaq
National Market as a result of the Company's failure to meet certain listing
requirements, corporate actions to restructure operations and reduce operating
expenses, and customer uncertainty regarding the Company's financial condition
has had, and are likely to have in the future, a material adverse effect on the
Company and its ability to sell its products in future.
FOREIGN CURRENCY
The Company's geographic markets are primarily in the United States and
Europe, with some sales in other parts of the world. In fiscal 1999, revenue
from the United States, Europe and other locations in the world were 85%, 12%
and 3%, respectively. This compares to 63%, 33% and 4%, respectively, in fiscal
1998 and 56%, 37% and 7%, respectively in fiscal 1997. The European currencies
have been relatively stable against the U.S. dollar for the past several years.
As a result, foreign currency fluctuations have not had a significant impact on
the Company's revenues or results of operations. The Company has recently
increased its sales efforts in international markets outside Europe, including
Asia and Latin America, whose currencies have tended to fluctuate more relative
to the U.S. dollar. In addition, the current continued weakness in Asian
currencies may result in reduced revenues from the countries affected by this
condition. Changes in foreign currency rates, the condition of local economies,
and the general volatility of software markets may result in a higher or lower
proportion of foreign revenues in the future. Although the Company's operating
and pricing strategies take into account changes in exchange rates over time,
there can be no assurance that future fluctuations in the value of foreign
currencies will not have a material adverse effect on the Company's business,
operating results and financial condition.
INFLATION
The Company believes that inflation has not had a material effect on
its operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
22
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products were
coded to accept only two digit entries in the date code field; however, these
date code fields need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' computer systems
and/or software were required to be upgraded or replaced to comply with such
"Year 2000" requirements.
The Company has completed a program, to review the Year 2000 compliance
status of the software and systems used in its internal business processes, to
obtain appropriate assurances of compliance from the manufacturers of these
products and agreement to modify or replace all non-compliant products. The
Company did address all issues identified prior to Year 2000 and did not
encounter any material difficulties.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company has tested all of its legacy products and
believes that its software products are generally Year 2000 compliant, meaning
that the use or occurrence of dates on or after January 1, 2000 will not
materially affect the performance of the Company's software products with
respect to four digit date dependent data or the ability of such products to
correctly create, store, process and output information related to such date
data. The Company did not encounter any significant Year 2000 problems for the
change from 1999 to 2000.. However, there can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with date functions. To the extent the Company's software products
are not fully Year 2000 compliant, there can be no assurance that the Company's
software products contain all necessary software routines and codes necessary
for the accurate calculation, display, storage and manipulation of data
involving dates. In addition, in certain circumstances, the Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company. In addition, some commentators have stated that a
significant amount of litigation will arise out of Year 2000 compliance issues,
and the Company is aware of lawsuits against other software vendors. Because of
the unprecedented nature of such litigation, it is uncertain to what extent the
Company may be affected by it.
In addition, management believes that future purchasing patterns of
customers and potential customers have been affected by Year 2000 issues, with
many companies expending significant resources to correct their software systems
for Year 2000 compliance. These expenditures have reduced funds available to
purchase software products such as those offered by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No items.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Altris Software, Inc.
We have audited the accompanying consolidated balance sheets of Altris Software,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the two
years then ended. These consolidated 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Altris Software,
Inc. as of December 31, 1999 and 1998,and the consolidated results of its
operations and its consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.
We have also audited Schedule II of Altris Software, Inc. for the year ended
December 31, 1999 and 1998. In our opinion, this Schedule presents fairly, in
all material respects, the information required to be set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations and has deficiencies in working capital and stockholders'
equity. Also, the Company has significant amounts of debt maturing in the year
ending December 31, 2000 . These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ GRANT THORNTON LLP
Irvine, California
February 16, 2000
24
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Altris Software, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 53 present fairly, in all material
respects, the financial position of Altris Software, Inc. and its subsidiaries
at December 31, 1997 and the results of their operations and their cash flows
for the year then ended, 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) on page
53, 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 the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit. We conducted our audit 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 audit provides a reasonable basis
for the opinion expressed above.
The Company's consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. We have not
audited the consolidated financial statements of Altris Software, Inc. and its
subsidiaries for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
Price Waterhouse LLP
San Diego, California
May 12, 1998
25
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
December 31,
------------------------------------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 142,000 $ 530,000
Receivables, net 355,000 1,128,000
Inventory, net - 277,000
Other current assets 92,000 244,000
------------ ------------
Total current assets 589,000 2,179,000
Property and equipment, net 436,000 1,565,000
Computer software, net 3,707,000 4,685,000
Goodwill, net - 2,645,000
Other assets 249,000 292,000
------------ ------------
Total assets $ 4,981,000 $ 11,366,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,507,000 $ 2,779,000
Accrued liabilities 1,512,000 1,934,000
Notes payable 574,000 745,000
Deferred revenue 2,289,000 3,230,000
------------ ------------
Total current liabilities 5,882,000 8,688,000
Long term notes payable - 468,000
Deferred revenue, long term portion 1,542,000 2,131,000
Other long term liabilities 1,223,000 1,263,000
Subordinated debt, net of discount 2,708,000 2,591,000
------------ ------------
Total liabilities 11,355,000 15,141,000
------------ ------------
Mandatorily redeemable convertible preferred stock, $1,000 par value, 3,000
shares authorized; 3,000 shares issued and outstanding ($3,770,000 and
$3,350,000 total liquidation preference, respectively) 3,423,000 3,003,000
Shareholders' deficit:
Common stock, no par value, 30,000,000 shares authorized;
13,101,734 and 9,614,663 issued and outstanding,
respectively 63,097,000 61,201,000
Common stock warrants 718,000 585,000
Accumulated other comprehensive income - (10,000)
Accumulated deficit (73,612,000) (68,554,000)
------------ ------------
Total shareholders' deficit (9,797,000) (6,778,000)
------------ ------------
Total liabilities and shareholders' deficit $ 4,981,000 $ 11,366,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
26
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31,
-------------------------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Licenses $ 2,046,000 $ 4,189,000 $ 8,154,000
Services and other 5,076,000 8,614,000 9,619,000
--------------- --------------- ----------------
Total revenues 7,122,000 12,803,000 17,773,000
--------------- --------------- ----------------
Cost of revenues:
Licenses 1,174,000 1,553,000 2,059,000
Services and other 3,142,000 5,474,000 7,324,000
--------------- --------------- ----------------
Total cost of revenues 4,316,000 7,027,000 9,383,000
--------------- --------------- ----------------
Gross profit 2,806,000 5,776,000 8,390,000
--------------- --------------- ----------------
Operating expenses:
Research and development 3,137,000 2,314,000 4,155,000
Marketing and sales 1,818,000 4,385,000 8,179,000
General and administrative 2,582,000 5,083,000 4,241,000
Settlement of lawsuits - 1,128,000 -
Write off of capitalized software - 625,000 190,000
--------------- --------------- ----------------
Total operating expenses 7,537,000 13,535,000 16,765,000
--------------- --------------- ----------------
Loss from operations (4,731,000) (7,759,000) (8,375,000)
Gain on sale of interest in subsidiary 257,000 - -
Interest and other income 25,000 31,000 383,000
Interest and other expense (609,000) (664,000) (447,000)
---------------- ---------------- -----------------
Net loss $ (5,058,000) $ (8,392,000) $ (8,439,000)
================ ================ =================
Basic net loss per common share $ (.50) $ (.92) $ (.90)
================ ================ =================
Diluted net loss per common share $ (.50) $ (.92) $ (.90)
================ ================ =================
Shares used in computing basic and diluted
net loss per common share 10,956,000 9,615,000 9,585,000
The accompanying notes are an integral part of these consolidated financial
statements.
27
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Accumulated
Common Other
Common Stock Stock Comprehensive Accumulated
Share Amount Warrants Income Deficit
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 9,559,944 $ 61,583,000 $ - $ 3,000 $(51,723,000)
Exercise of stock options 54,719 193,000 - - -
Issuance of common stock warrants - - 585,000 - -
Preferred stock dividends - (176,000) - - -
Foreign currency translation adjustment - - - 22,000 -
Net loss - - - - (8,439,000)
Total comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 9,614,663 61,600,000 585,000 25,000 (60,162,000)
Preferred stock dividends - (408,000) - - -
Stock option issues as compensation
to non-employee - 9,000 - - -
Foreign currency translation adjustment - - - (35,000) -
Net loss - - - - (8,392,000)
Total comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 9,614,663 61,201,000 585,000 (10,000) (68,554,000)
Preferred stock dividends - (420,000) - - -
Exercise of stock options 58,500 16,000 - - -
Issuance of common stock warrants - - 68,000 - -
Change in warrant exercise price - - 65,000 - -
Common stock issued 2,000,000 1,800,000 - - -
Common stock, issued for debt conversion 1,428,571 500,000 - - -
Foreign currency translation adjustment - - - 10,000 -
Net loss - - - - (5,058,000)
Total comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 13,101,734 $ 63,097,000 $ 718,000 $ - $(73,612,000)
============ ============ ============ ============ ============
Comprehensive
Total Loss
------------ ------------
Balance at December 31, 1996 $ 9,863,000
Exercise of stock options 193,000
Issuance of common stock warrants 585,000
Preferred stock dividends (176,000)
Foreign currency translation adjustment 22,000 $ 22,000
Net loss (8,439,000) (8,439,000)
------------
Total comprehensive loss $ (8,417,000)
============
------------
Balance at December 31, 1997 2,048,000
Preferred stock dividends (408,000)
Stock option issues as compensation
to non-employee 9,000
Foreign currency translation adjustment (35,000) $ (35,000)
Net loss (8,392,000) (8,392,000)
------------
Total comprehensive loss $ (8,427,000)
============
------------
Balance at December 31, 1998 (6,778,000)
Preferred stock dividends (420,000)
Exercise of stock options 16,000
Issuance of common stock warrants 68,000
Change in warrant exercise price 65,000
Common stock issued 1,800,000
Common stock, issued for debt conversion 500,000
Foreign currency translation adjustment 10,000 10,000
Net loss (5,058,000) (5,058,000)
------------
Total comprehensive loss $ (5,048,000)
============
------------
Balance at December 31, 1999 $ (9,797,000)
============
The accompanying notes are an integral part of these consolidated financial
statements.
28
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year Ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net Loss $(5,058,000) $(8,392,000) $(8,439,000)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 2,320,000 2,659,000 2,389,000
Loss on disposal of assets - 46,000 15,000
Gain on sale of interest in subsidiary (257,000) - -
Change in warrant exercise price 65,000 - -
Warrants issued to consultant 68,000 - -
Settlement of lawsuits - 1,128,000 -
Write down of certain assets - 625,000 190,000
Changes in assets and liabilities, net of effect of dispositions:
Receivables, net 513,000 1,917,000 2,005,000
Inventory 269,000 183,000 12,000
Other assets 232,000 403,000 328,000
Accounts payable (466,000) (149,000) 441,000
Accrued liabilities 405,000 (815,000) 1,072,000
Deferred revenue (678,000) 3,591,000 222,000
Other long term liabilities (65,000) (38,000) (590,000)
------------ ----------- -----------
Net cash provided by (used in) operating activities (2,652,000) 1,158,000 (2,355,000)
------------ ----------- -----------
Cash flows from investing activities:
Net proceeds from sale of interest in subsidiary 205,000 - -
Purchases of property and equipment (12,000) (137,000) (833,000)
Sale of maturity of short term investments - 133,000 1,652,000
Purchases of short term investments held to maturity - - (1,499,000)
Purchases of software - (294,000) (41,000)
Computer software capitalized - (2,355,000) (1,651,000)
------------ ----------- -----------
Net cash used in investing activities 193,000 (2,653,000) (2,372,000)
------------ ----------- -----------
Cash flows from financing activities:
Repayments of revolving loan and bank agreements (355,000) (333,000) (2,689,000)
Proceeds from sale of common stock 1,800,000 - -
Proceeds from Spescom loan 600,000 - -
Proceeds from exercise of stock options 16,000 - 193,000
Net borrowings under revolving loan and bank agreements - 542,000 1,780,000
Net proceeds from issuance of preferred stock - - 2,653,000
Payment of preferred stock dividends - (87,000) (147,000)
Net proceeds from issuance of subordinated debt and warrants - - 3,000,000
Cash payments for debt issuance costs - - (347,000)
------------ ----------- -----------
Net cash provided by financing activities 2,061,000 122,000 4,443,000
------------ ----------- -----------
Effect of exchange rate changes on cash 10,000 (35,000) 22,000
------------ ----------- -----------
Net decrease in cash and cash equivalents (388,000) (1,408,000) (262,000)
Cash and cash equivalents at beginning of period 530,000 1,938,000 2,200,000
------------ ----------- -----------
Cash and cash equivalents at end of period $ 142,000 $ 530,000 $ 1,938,000
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
29
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered recurring losses and has an accumulated
deficit of $73,612,000, a working capital deficit of $5,293,000 and a deficit in
shareholders' equity of $9,797,000 as of December 31, 1999, which raise
substantial doubt about the Company's ability to continue as a going concern.
Due to significant losses and decreasing sales, the Company, reduced its payroll
cost, the largest cost element. In addition, the Company has made further
reductions of other expenditures. The Company's ability to continue operations
is dependent upon the generation of new system sales of Altris eB-Registered
Trademark- in the near term, which cannot be assured. Given the substantial
uncertainties confronting the Company, there can be no assurance that sufficient
cash flows will be generated by the Company in the near term to meet its current
obligations.
In January 2000, the Company's Board of Directors approved, subject to
approval by the Company's shareholders, to issue Spescom Ltd. ("Spescom")
5,258,714 shares of common stock for $3,700,000 and to exchange its subordinated
debt and convertible preferred stock, which are held by Spescom, along with
related accrued interest and dividends, for 9,528,096 shares of common stock.
(See Note 14.) Management believes that such additional cash infusion is
necessary to enable the Company to meet its short-term needs for working
capital. There can be no assurance that this equity financing will be approved
by the Company's shareholders and consummated or that it will be sufficient to
meet the Company's working capital needs. Failure to complete this financing,
can be expected to have a material adverse effect on the Company's business,
results of operations, and financial condition.
NOTE 2 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company develops, markets and supports a suite of object-oriented,
client/server document management software products. These products were
developed to enable customers in a broad range of industries to effectively and
efficiently manage, share and distribute critical business information,
expertise and other intellectual capital.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. As described further in Note 3, the
results of operations for Altris Software Ltd. have been included through March
31, 1999, at which time the equity method of accounting was applied.
FOREIGN CURRENCY
The functional currency of the Company's United Kingdom subsidiary is
the pound sterling. Assets and liabilities are translated into U.S. dollars at
end-of-period exchange rates. Revenues and expenses are translated at average
exchange rates in effect for the period. Net currency exchange gains or losses
resulting from such translations are excluded from net income and accumulated as
other comprehensive income in a separate component of shareholders' equity.
Gains and losses resulting from foreign currency transactions, which are not
significant, are included in the Consolidated Statements of Operations.
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 also
requires disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates made by management include realizability of deferred
income tax assets, capitalized software costs, goodwill, allowance for doubtful
accounts and reserves for excess or obsolete inventory.
30
REVENUE RECOGNITION
The Company's revenues are derived from sales of its document
management systems that are primarily composed of software and services,
including maintenance, training and consulting services, and third party
software and hardware. In 1999 and 1998, the Company recognized revenue in
accordance with Statement of Position (SOP) 97-2 "Software Revenue Recognition."
Effective January 1, 1999, the Company also implemented SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions", which applies to certain multiple-element arrangements. The
implementation of SOP 97-2 and 98-9 did not materially affect the Company's
revenue recognition policies.
Software license and third party product revenues are recognized upon
shipment of the product if no significant vendor obligations remain and
collection is probable. In cases where a significant vendor obligation exists,
revenue recognition is delayed until such obligation has been satisfied. For new
software products where a historical record has not yet been demonstrated that
acceptance is perfunctory, the Company defers recognition of revenue until
acceptance has occurred. Annual maintenance revenues, which consist of ongoing
support and product updates, are recognized on a straight-line basis over the
term of the contract. Payments received in advance of performance of the related
service for maintenance contracts are recorded as deferred revenue. Revenues
from training and consulting services are recognized when the services are
performed and adequate evidence of providing such services is available.
Contract revenues for long term contracts or programs requiring specialized
systems are recognized using the percentage-of-completion method of accounting,
primarily based on contract labor hours incurred to date compared with total
estimated labor hours at completion. Provisions for anticipated contract losses
are recognized at the time they become known.
Contracts are billed based on the terms of the contract. There are no
retentions in billed contract receivables. Unbilled contract receivables relate
to revenues earned but not billed at the end of the period. Billings in excess
of costs incurred and related earnings are included in deferred revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107,
"Disclosures About Fair Value of Financial Instruments", requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as cash or a contractual obligation that both conveys to one entity
a right to receive cash or other financial instruments from another entity, and
imposes on the other entity the obligation to deliver cash or other financial
instruments to the first entity. At December 31, 1999 and 1998, management
believes that the carrying amounts of cash and cash equivalents, short-term
investments, receivable and payable amounts, and accrued expenses approximate
fair value because of the short maturity of these financial instruments. The
Company believes that the carrying value of its loans and lines of credit
approximate their fair values as they reprice based on the prime rate and adjust
for significant changes in credit risk, and the carrying value of the
subordinated debt approximates its fair value.
CONCENTRATION OF CREDIT RISK
The Company provides products and services to customers in a variety of
industries worldwide, including petrochemicals, utilities, manufacturing and
transportation. Concentration of credit risk with respect to trade receivables
is limited due to the geographic and industry dispersion of the Company's
customer base.
INVENTORY
Inventory consists of parts, supplies and subassemblies primarily used
in maintenance contracts which service the Company's hardware products sold in
prior years. Inventory is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. As of December 31, 1999
and 1998, the Company had provided a reserve of $920,000 and $651,000,
respectively, to reduce the carrying amount to its estimated net realizable
value. All inventory has been fully reserved as of December 31, 1999.
31
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over useful lives of two to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
useful life or the term of the related lease. Expenditures for ordinary repairs
and maintenance are expensed as incurred while major additions and improvements
are capitalized.
GOODWILL
Goodwill represents the excess of cost of purchased businesses over the
fair value of tangible and identifiable intangible net assets acquired at the
date of acquisition. Goodwill is amortized over its estimated useful life of
four to seven years. The Company evaluates the carrying value of unamortized
goodwill at each balance sheet date to determine whether any adjustments are
required. In late 1998, the Company reduced the life of the goodwill associated
with its United Kingdom subsidiary from seven to four years as a result of
uncertainties due to recurring significant losses and negative cash flow of the
subsidiary. In conjunction with the sale of an interest in its United Kingdom
subsidiary in the second quarter of 1999, (see Note 3) the Company eliminated
all goodwill and accumulated amortization related to the United Kingdom
subsidiary. Accumulated amortization of goodwill was $0 and $3,014,000 at
December 31, 1999 and 1998, respectively. The related amortization expense was
$738,000, $1,269,000 and $853,000 for the years ended December 31, 1999, 1998
and 1997, respectively. All goodwill has been fully amortized as of December 31,
1999.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE
Software development costs and purchased software are capitalized when
technological feasibility and marketability of the related product have been
established. Software development costs incurred solely in connection with a
specific contract are charged to cost of revenues. Capitalized software costs
are amortized on a product-by-product basis, beginning when the product is
available for general release to customers. Annual amortization expense is
calculated using the greater of the ratio of each product's current gross
revenues to the total of current and expected gross revenues or the straight
line method over the estimated useful life of three to four years. Accumulated
amortization of capitalized software costs was $939,000 and $1,216,000 at
December 31, 1999 and 1998, respectively. The related amortization expense was
$711,000, $381,000 and $712,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company evaluates the carrying value of unamortized capitalized
software costs at each balance sheet date to determine whether any impairment
adjustments are required. In late 1998, the Company made certain changes in the
architecture of its Altris eB-Registered Trademark- product to utilize Microsoft
Transaction Server. As a result of these changes, the Company abandoned a
certain portion of its previously developed server code and expensed the related
capitalized software costs totaling $625,000 in 1998. In 1997, the Company wrote
off $190,000 of certain capitalized software development costs related to
products for which costs were deemed to be unrecoverable due to the future
product direction of the Company.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs related to the Subordinated Debt (see Note
5) are recorded at cost and are being amortized over 5 years using the
straight-line method, which is considered to approximate the effective interest
rate method. Accumulated amortization of debt issuance costs was $174,000 and
$104,000 at December 31, 1999 and 1998, respectively. The related amortization
expense was $70,000 for each of the years ended December 31, 1999 and 1998 and
$34,000 for the year ended December 31, 1997.
32
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances have made
recovery of the asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset.
STOCK BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss and basic and diluted net loss per share as if the fair
value-based method had been applied in measuring compensation expense.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the change during the year in the deferred
income tax asset or liability. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be "more
likely than not" realized in the future based on the Company's current and
expected operating results.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed as net loss plus accretion
of dividends on mandatorily redeemable convertible preferred stock divided by
the weighted average number of common shares outstanding during the year.
Diluted net loss per common share is computed as net loss divided by the
weighted average number of common shares and potential common shares, using the
treasury stock method, outstanding during the year and assumes conversion into
common stock at the beginning of each period of all outstanding shares of
convertible preferred stock. Computations of basic and diluted earnings per
share do not give effect to individual potential common stock instruments for
any period in which their inclusion would be anti-dilutive.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company implemented SFAS No. 130
effective January 1, 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform with the current presentation.
STATEMENT OF CASH FLOWS
Cash and cash equivalents are comprised of cash on hand and short-term
investments with original maturities of less than 90 days.
33
For 1999, cash and non-cash investing and financing activities relating
to the disposition of 60% of Altris Software, Ltd. (see Note 3) were as follows:
Accounts receivable, net $ (259,000)
Other assets (15,000)
Property and equipment, net (611,000)
Goodwill (1,907,000)
Accounts payable 806,000
Accrued liabilities 827,000
Current portion notes payable 384,000
Deferred revenue 952,000
-----------
Net liabilities assumed by Spescom 177,000
Total cash received 205,000
Deferred gain at December 31, 1999 (125,000)
-----------
Net gain recognized in 1999 $ 257,000
===========
The following table provides supplemental cash flow information:
For the Year Ended December 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
Supplemental cash flow information:
Interest paid $ 349,000 $ 445,000 $ 294,000
============== ============= ==============
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 420,000 $ 408,000 $ 29,000
============== ============= ==============
Loan converted to stock $ 500,000 $ - $ -
============== ============= ==============
Stock option issued as compensation
to non-employee $ - $ 9,000 $ -
============== ============= ==============
NOTE 3 - SPESCOM AND RELATED PARTIES
In May 1999, the Company completed a transaction with Spescom, whereby
Spescom invested $1,800,000 for 2,000,000 shares of the Company's common stock.
In addition, as part of the transaction, Spescom paid the Company an additional
$1,000,000 and invested $1,200,000 directly into the Company's United Kingdom
subsidiary, Altris Software Ltd. ("ASL") for a 60% ownership interest in ASL. In
conjunction with the transaction, the Company contributed $400,000 into ASL and
retained a 40% interest in ASL. The Company deposited $200,000 of the proceeds
from the transaction into an escrow account. The Company also recorded a
deferred gain of $200,000 relating to the funds escrowed. In November 1999,
Spescom released the $200,000 in escrow. In 1999, the Company recorded a gain of
$257,000, net of expenses, on the sale of an interest in ASL. As of December 31,
1999 the Company has deferred $125,000 for potential warranty claims.
Other terms of the transaction include Spescom's right to nominate one
director for election to the Company's board of directors. In addition, the
shares of stock representing the Company's 40% interest in ASL have been pledged
to Spescom to secure the obligations of the Company to Spescom, such pledge not
to extend beyond the second anniversary of the closing date. In January 2000,
the Company entered into an agreement, subject to shareholder approval, to
transfer the remaining 40% of ASL to Spescom and to acquire the EMS 2000
technology from Spescom (see Note 14).
In addition, the Company entered into a distribution agreement with ASL
which grants ASL exclusive distribution rights for the Company's products around
the world, excluding North and South America and the Caribbean. Under this
distribution agreement, this exclusivity is contingent upon ASL meeting certain
minimum royalty commitments beginning in 2002. The agreement provides for a
royalty to the Company on sales of the
34
Company's products by ASL. Royalties to the Company totaled $188,000 in 1999. At
December 31, 1999, the Company had a receivable from ASL in the amount of
$44,000.
Also as part of the May 1999 transaction, the Company became Spescom's
exclusive distributor of EMS 2000, Spescom's configuration management (CM)
product, in North and South America and the Caribbean. In 1999, the Company
purchased software and services from Spescom totaling $146,000. At December 31,
1999 the Company had an accounts payable to Spescom of $50,000.
In order for the Company to obtain consent to this Spescom transaction
by the investor holding the Company's subordinated debenture and the Company's
Series D Convertible Preferred Stock ("the Investor") to the May 1999 Spescom
transaction, the interest rate on the subordinated debenture was increased from
11.5% to 12% (see Note 5). In addition, the Series D Convertible Preferred Stock
was exchanged for Series E Convertible Preferred Stock with substantially
similar terms except that the conversion rate was adjusted from $6.00 per share
of common stock to $1.90 and the exercise price on warrants entitling the
Investor to purchase 300,000 shares of the Company's common stock was also
adjusted from $6.00 to $1.90 per share (See Note 8). As a result of the change
in exercise price, the Company recorded an additional expense of $65,000
relating to the May 1999 Spescom transaction.
In September 1999, the Company completed a loan transaction with
Spescom providing the Company a loan of $500,000 convertible at the option of
Spescom into common stock at $0.35 per share. This loan was converted into
1,428,571 shares of common stock in December 1999. Cash used in operating
activities totaled $2,652,000 primarily relating to the net operating loss for
1999.
NOTE 4 - BALANCE SHEET INFORMATION
December 31,
-------------------------------------
1999 1998
---- ----
RECEIVABLES, NET:
Billed receivables $ 424,000 $ 1,193,000
Unbilled receivables - 129,000
Less allowance for doubtful accounts (69,000) (194,000)
------------- -------------
$ 355,000 $ 1,128,000
============= =============
PROPERTY AND EQUIPMENT, NET:
Computer equipment $ 2,260,000 $ 6,339,000
Machinery and equipment 239,000 455,000
Furniture and fixtures 135,000 602,000
Leasehold improvements 46,000 570,000
------------- -------------
2,680,000 7,966,000
Less accumulated depreciation
and amortization (2,244,000) (6,401,000)
------------- -------------
$ 436,000 $ 1,565,000
============= =============
ACCRUED LIABILITIES:
Employee compensation and related expenses $ 191,000 $ 228,000
Accrued vacation 271,000 261,000
Sales and VAT taxes payable 39,000 255,000
Accrued loss on office closure 47,000 29,000
Other 964,000 1,161,000
------------- -------------
$ 1,512,000 $ 1,934,000
============= =============
35
December 31,
-------------------------------------
1999 1998
---- ----
OTHER LONG TERM LIABILITIES:
Accrued loss on office closure $ 15,000 $ 77,000
Settlement of lawsuits 1,128,000 1,128,000
Other 80,000 58,000
------------- -------------
$ 1,223,000 $ 1,263,000
============= =============
NOTE 5 - NOTES PAYABLE AND SUBORDINATED DEBT
Notes payable and subordinated debt consist of the following:
December 31,
-------------------------------------
1999 1998
---- ----
Short term loan $ 100,000 $ -
Revolving loans 474,000 838,000
United Kingdom overdraft facility - 375,000
Subordinated debt, less discount of $292,000 in 1999
and $409,000 in 1998 2,708,000 2,591,000
------------- -------------
$ 3,282,000 $ 3,804,000
============= =============
In November 1999, the Company received a short-term loan of $100,000
from Spescom. The loan bears interest at 10% and is to be repaid from the
proceeds of the proposed private placement offering with Spescom, which is
subject to approval by the shareholders of the Company (see Note 14). If the
private placement offering is not completed by March 31, 2000, all amounts owing
to Spescom in connection with this loan may, at Spescom's option, be converted
into shares of the Company's common stock at a conversion price of $0.70 per
share.
The Company has a revolving loan and security agreement, which provides
for borrowings of up to $1,000,000. The maximum credit available under the
facility declines by $200,000 each year beginning in March 1997. The loan is
payable in monthly installments of $16,667 plus interest equal to the 30-day
Commercial Paper Rate plus 2.95% (9.00% December 31, 1999). At December 31,
1999, $474,000 was outstanding under the agreement with no additional funds
available. Total borrowings under the revolving loan and security agreement are
collateralized by the Company's assets. The revolving loan and security
agreement contains certain restrictive covenants, including the maintenance of a
minimum ratio of debt to tangible net worth, for which the Company was in
violation at December 31, 1999. The Company obtained a waiver of such violations
through March 15, 2000. In May 1999, in order to obtain the consent for the
Spescom transaction from the lender, the Company agreed to reduce the principal
balance of the combined facilities by a total of $150,000 on or before June 30,
1999. The Company has not made the payment and is in violation of the agreement.
At December 31, 1998 interest on the United Kingdom overdraft facility
was calculated at 3.0% per annum over the bank's base rate (9.5% at December 31,
1998). Repayment of the borrowings under the facility was collateralized by the
property and assets of the Company's United Kingdom subsidiary, including a
(pound)100,000 certificate on deposit. As a result of the May 1999 Spescom
transaction, the indebtness under the facility is no longer included in the
Company's liabilities.
In June 1997, the Company issued a five year, 11.5% subordinated
debenture with quarterly interest payments for gross proceeds of $3,000,000. In
conjunction with the debt, the Company granted warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $6.00 per share.
The warrants are exercisable over a five-year period from the date of issuance.
A portion of the proceeds from the debt has been allocated to common stock
warrants, which are valued at $650,000 and recorded as a discount on the debt.
The discount is being amortized over five years. In the event the debt is
outstanding at June 2000,
36
and each year thereafter, the Company will grant in each year additional five
year warrants to purchase 50,000 shares of common stock at an exercise price of
$7.00 per share. A value has not been ascribed to these contingent warrants. At
such time that the warrants are no longer contingent, a value, if any, will be
ascribed. In November 1998, the Company entered into a Security Agreement with
the Investor providing the Investor with a second priority security interest in
the inventory, accounts receivable, general intangibles and certain other assets
of the Company. The Investor's security interest is subordinated to the first
priority security interest of the lender under the Company's revolving credit
agreements. In May 1999, the Company agreed to increase the interest rate on the
subordinated debenture from 11.5% to 12% and reduce the exercise price on the
Lender Warrants to $1.90 per share (see Note 3). In December 1999, Spescom
acquired all rights of the debt from the Investor. As described in Note 14, if
the proposed transactions with Spescom are approved by the Company's
shareholders, the subordinated debenture will be exchanged for common stock.
In March 1997, the Company borrowed $300,000 from an officer of the
Company. The note was for a maximum of three months with a 12% per annum
interest rate. The entire balance and accrued interest was paid in July 1997.
Future maturities of notes payable and long-term debt are as follows at
December 31, 1999:
Year Ending December 31,
------------------------
2000 $ 574,000
2001 -
2002 3,000,000
-------------
3,574,000
Less unamortized discount (292,000)
-------------
$ 3,282,000
=============
NOTE 6 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
For the Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
---- ---- ----
Net Loss Used:
Net loss $ (5,058,000) $ (8,392,000) $ (8,439,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (420,000) (408,000) (176,000)
---------------- --------------- ---------------
Net loss used in computing basic and diluted net
loss per share $ (5,478,000) $ (8,800,000) $ (8,615,000)
================ =============== ===============
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 10,956,000 9,615,000 9,585,000
Average employee stock options to acquire 954,000, 739,000, and
544,000, shares, were outstanding in fiscal 1999, 1998 and 1997, respectively,
but were not included in the computation of diluted earnings per share because
their effect was antidilutive. In addition, 3,000 shares of convertible
preferred stock for each of the years ended December 31, 1999, 1998 and 1997
were also excluded from the computation of diluted earnings per share because
the effect was antidilutive.
37
NOTE 7 - FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter ending December 31,
1998 are summarized below. These adjustments do not result in adjustments to
previously released financial information for earlier quarters of fiscal 1998.
On March 3, 1999, the Company entered into a Memorandum of
Understanding providing for the settlement of certain securities class action
lawsuits pending against the Company. The Company recorded expense of $1,128,000
in the fourth quarter 1998 in connection with this settlement. In the fourth
quarter 1998, the Company made certain changes in the architecture of its Altris
eB-Registered Trademark- product to utilize Microsoft Transaction Server. As a
result of these changes, the Company abandoned a certain portion of its
previously developed server code and expensed the related capitalized software
costs totaling $625,000. In addition, in the fourth quarter, 1998, the Company
reduced the life of the goodwill associated with its United Kingdom subsidiary
from seven to four years as a result of uncertainties regarding future benefits
to the Company provided by the goodwill due to recurring significant losses and
negative cash flow of the subsidiary. The Company increased goodwill
amortization expense by $450,000 in the fourth quarter to reflect this
adjustment to the remaining estimated useful life of goodwill associated with
its United Kingdom subsidiary.
Settlement of lawsuits $1,128,000
Capitalized software costs expensed due to
change in architecture of Altris eB-Registered Trademark- 625,000
Additional amortization of goodwill 450,000
----------
Increase in net loss $2,203,000
==========
NOTE 8 - CONVERTIBLE PREFERRED STOCK:
In June 1997, the Company issued 3,000 shares of its Series D
Convertible Preferred Stock ("the Series D Preferred Stock") for gross proceeds
of $3,000,000 ($2,653,000 net of issuance costs). In May 1999, the Company
exchanged 3,000 shares of its Series E Convertible Preferred Stock (the Series E
Preferred Stock) for the issued and outstanding Series D Preferred Stock. The
Series E Preferred Stock bears a dividend of 11.5% per annum and is convertible
into the Company's common stock at a price of $1.90 per share. Since March 1998
the Company has been in default of certain covenants under the agreement, as
amended, pursuant to which the Company issued the Series D Preferred Stock and
Series E Preferred Stock, resulting in a dividend rate increase to 14% per
annum. In addition, if the Company fails to pay dividends on six consecutive
dividend payment dates, or the aggregate amount of unpaid dividends equals or
exceeds $172.50 per share, then the Investor shall be entitled to nominate an
additional director to the Company's board.
The Company may redeem the Series E Convertible Preferred Stock at its
option after June 1999 if an average trading price for the common stock equals
or exceeds $9.50 per share or after June 2002, irrespective of the trading
price. The Series E Preferred Stock redemption price per share is equal to the
sum of $1,000, plus all accrued and unpaid dividends and interest on such unpaid
dividends at an annual rate of 11.5% (increased to 14% as a result of the event
of default). If the number of shares issuable upon conversion of the Series E
Preferred Stock, when added to all other shares of common stock issued upon
conversion of the Series E Preferred Stock and any shares of common stock issued
or issuable upon the exercise of the warrants would exceed 1,906,692 shares of
common stock (the "Issuable Maximum"), then the Company shall be obligated to
effect the conversion of only such portion of the Series E Preferred Stock
resulting in the issuance of shares of common stock up to the Issuable Maximum,
and the remaining portion of the Series E Preferred Stock shall be redeemed by
the Company for cash in accordance with the procedures set forth in the
Certificate of Determination. In the event of mandatory redemption, when the
number of shares exceeds the Issuable Maximum, the redemption price per share is
equal to the redemption price under the optional redemption feature, plus the
appreciation in the value of the Company's common stock and conversion price on
the date of redemption.
In connection with the issuance of the Series D Preferred Stock and
Series E Preferred Stock, the Company agreed to grant warrants to purchase the
following number of shares of its common stock if the Series
38
E Preferred Stock remains outstanding on each of the following dates: (i) on
June 27, 2000 for 50,000 shares, at an exercise price of $7.00 per share
(adjusted to $1.90), if the Series E Preferred Stock has not been redeemed or
converted in full on or prior to June 27, 2000; (ii) on June 27, 2001 for 50,000
shares, at an exercise price of $7.00 (adjusted to $1.90) per share, if the
Series E Preferred Stock has not been redeemed or converted in full on or prior
to June 27, 2001; (iii) on July 17, 2002 for 250,000 shares, at an exercise
price equal to the trading price per share on the issuance date of the warrant,
if the Series E Preferred Stock has not been redeemed or converted in full on or
prior to July 17, 2002; and (iv) on June 27, 2003 for 250,000 shares, at an
exercise price equal to the trading price per share on the issuance date of the
warrant, if the Series E Preferred Stock has not been redeemed or converted in
full on or prior to June 27, 2003. Such warrants are exercisable over a
five-year period from the date of grant. A value has not been ascribed to these
contingent warrants. At such time that the warrants are no longer contingent, a
value will be ascribed, if any. In connection with the debt (see Note 5) and
Series D Convertible Preferred Stock issuance, the Company paid $120,000 to a
director of the Company for his service related to the offering.
Each share of Series E Preferred Stock is entitled to one vote on all
matters submitted to the holders of the common stock. In the event of
liquidation of the Company, the Series E Preferred Stockholders will receive in
preference to the common stockholders an amount equal to $1,000 per share plus
accrued but unpaid dividends and interest on all such dividends at an annual
rate of 11.5% (increased to 14% as a result of the event of default). As of
December 31, 1999 and 1998 accumulated unpaid dividends amounted to $770,000 and
$350,000.
In December 1999, Spescom acquired the Series E Preferred Stock and all
accrued dividends (see Note 14). If the proposed transactions with Spescom (see
Note 14) are approved by the Company's shareholders and the other conditions to
consummating the transaction are met the Series E Preferred Stock is expected to
be exchanged for common stock.
NOTE 9- COMMON STOCK OPTIONS:
At December 31, 1999, the Company had two stock-based compensation
plans (the "Plans") which are described below. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its plans. No compensation cost was recognized for its employee stock option
grants, which were fixed in nature, as the options were granted at fair market
value. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under the
plans consistent with the method of Financial Accounting Standards Board
Statement No. 123, the Company's net loss and pro forma net loss per share would
have been adjusted to the pro forma amounts indicated below:
For the Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
Net loss used in computing net loss per share
As reported $ (5,478,000) $ (8,800,000) $ (8,615,000)
Pro forma $ (5,612,000) $ (9,253,000) $ (10,060,000)
Basic and diluted net loss per share
As reported $ (.50) $ (.92) $ (.90)
Pro forma $ (.51) $ (.96) $ (1.05)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
1999 1998 1997
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 127% 112% 78%
Risk-free interest rate 6.4% 5.1% 6.4%
Expected lives (years) 5 5 5
39
In April 1996, the Company adopted its 1996 Stock Incentive Plan (the
"1996 Plan"). The 1996 Plan is administered by either the Board of Directors or
a committee designated by the Board to oversee the plan. In August 1998, the
Shareholders approved an amendment to the Plan which increased from 625,000 to
925,000 the maximum number of shares of Common Stock that may be issued under
the 1996 Plan. In October 1999, the maximum shares was again increased to
1,425,000. As of December 31, 1999, there are 1,365,250 remaining authorized
shares subject to grants but unissued. Under the Company's 1987 Stock Option
Plan, the maximum number of shares of Common Stock issued were 1,200,000 of
which there are no remaining shares available for grant. There are 83,500
remaining authorized shares available for future grants, but unissued.
The option vesting period under the plans is determined by the Board of
Directors or a Stock Option Committee and usually provides that 25% of the
options granted can be exercised 90 days from the date of grant, and thereafter,
those options become exercisable in additional cumulative annual installments of
25% commencing on the first anniversary of the date of grant. Options granted
are generally due to expire upon the sooner of ten years from date of grant,
thirty days after termination of services other than by reason of convenience of
the Company, three months after disability, or one year after the date of the
option holder's death. The option exercise price is equal to the fair market
value of the common stock on the date of grant.
Options granted to employees under the plans may be either incentive
stock options or nonqualified options. Only nonqualified options may be granted
to nonemployee directors.
The following tables summarizes information about employee stock options
outstanding:
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 836,750 $ 1.23 641,813 $ 5.43 445,212 $ 5.12
Options granted 658,000 .51 732,000 .41 532,751 5.80
Options exercised (58,500) .27 - - (54,719) 3.52
Options forfeited (266,000) 1.04 (537,063) 5.14 (281,431) 6.00
--------- --------- ---------
Outstanding at end of year 1,170,250 .92 836,750 1.23 641,813 5.43
========= ========= =========
Options exercisable at end of year 443,250 263,910 276,887
Weighted average fair value of options
granted during the year $.51 $.43 $4.02
The following tables summarizes information about employee stock
options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding at remaining average exercisable at average
Exercise prices December 31, 1999 contractual life exercise price December 31, 1999 exercise price
--------------- ----------------- ---------------- -------------- ----------------- --------------
$.25 to $.25 272,000 8.70 years $0.25 188,500 $0.25
$.34 to $.50 226,250 9.29 years $0.43 71,000 $0.43
$.56 to $.75 564,500 9.44 years $0.59 90,500 $0.63
$3.38 to $5.00 55,000 1.78 years $4.71 43,750 $4.63
$5.94 to $7.88 52,500 4.23 years $6.07 49,500 $6.04
---------- -------
$.25 to $7.88 1,170,250 8.64 years $0.92 443,250 $1.44
========= =======
40
NOTE 10- INCOME TAXES:
Deferred tax assets and liabilities are comprised of the following:
December 31,
--------------------------------------------
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $18,740,000 $16,655,000
Research and development costs 644,000 959000
Depreciation and amortization 387,000 197,000
Inventory 591,000 561,000
Deferred revenue 901,000 1,161,000
Accruals 784,000 168,000
Credits 1,150,000 -
Other 83,000 603,000
---------------- ---------------
Total deferred tax assets 23,280,000 20,304,000
Valuation allowance (23,280,000) (20,304,000)
---------------- ---------------
Deferred taxes $ - $ -
================ ===============
The Company has recorded a valuation allowance amounting to the entire
net deferred tax asset balance due to its lack of a history of consistent
earnings, possible limitations on the use of carryforwards, and the expiration
of certain of the net operating loss carryforwards which gives rise to
uncertainty as to whether the net deferred tax asset is realizable.
In connection with the acquisition of ASL, the Company acquired
$926,000 in deferred tax assets of which $626,000 was provided as a valuation
allowance. In June 1997, the $300,000 tax asset was realized. In the event that
the remaining tax benefits acquired in the ASL acquisition are realized, such
benefits will be used first to reduce any remaining goodwill and other
intangible assets related to the acquisition. Once those assets are reduced to
zero, the benefit will be included as a reduction of the Company's income tax
provision.
No income tax expense was recognized in 1999, 1998 or 1997 as the
Company has net operating loss carryforwards of $52,717,000 and $8,294,000 for
federal and state tax purposes, respectively, which expire over the years 2000
through 2019. Net operating losses acquired in another acquisition are limited
to $8,000,000 offset against that entity's future taxable income, subject to an
approximate $500,000 annual limitation. In addition, if certain substantial
changes in the Company's ownership should occur, there would be a limitation on
the amount of the consolidated net operating loss carryforwards and tax credits
which can be utilized in any one year. The Company has investment and research
activity credit carryforwards aggregating $1,150,000, which will substantially
expire in the years 2000 through 2005.
If the proposed share issuance to Spescom as approved by the Company's
Board of Directors is approved by shareholders and consummated (see Note 14),
Spescom would own approximately 66% of the voting control of the Company and,
because Spescom would have acquired its entire majority interest in the Company
within one year, this would constitute an "ownership change" under the Code.
Thus, the Company's ability to use its NOL and credit carryforwards in future
years would be delayed and, to the extent the carryforward amounts could not be
fully utilized under the limitations discussed above within the carryforward
periods, these carryforwards would be lost. Accordingly, if the Company
generated net income in future years, the Company would be required to pay more
Federal income taxes or to pay such taxes sooner than if the use of its NOL and
credit carryforwards were not restricted.
41
NOTE 11- SEGMENT AND GEOGRAPHIC INFORMATION:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. SFAS No. 131 establishes standards for the way that 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 implemented SFAS No. 131 for
the year ended December 31, 1998
The Company has one business segment which consists of the development
and sale of a suite of client/server document management software products.
Revenues for 1999, 1998 and 1997 by customer location are as follows:
1999 1998 1997
---- ---- ----
United States $ 6,030,000 $ 7,977,000 $ 9,922,000
Europe, primarily United Kingdom 878,000 4,337,000 6,599,000
Other International 214,000 489,000 1,252,000
----------- ------------ ------------
$ 7,122,000 $ 12,803,000 $ 17,773,000
=========== ============ ============
Information by geographic location for the years ended December 31,
1999, 1998 and 1997 follows:
Corporate
United Research &
States Europe Development Consolidated
------ ------ ----------- ------------
1999
Net sales $ 6,015,000 $ 1,107,000 $ - $ 7,122,000
Operating loss (1,559,000) (36,000) (3,136,000) (4,731,000)
Identifiable assets 4,981,000 - - 4,981,000
1998
Net sales $ 8,413,000 $ 4,390,000 - $ 12,803,000
Operating loss (3,133,000) (2,312,000) $ (2,314,000) (7,759,000)
Identifiable assets 5,444,000 5,922,000 - 11,366,000
1997
Net sales $ 10,861,000 $ 6,912,000 - $ 17,773,000
Operating loss (1,726,000) (2,494,000) $ (4,155,000) (8,375,000)
Identifiable assets 7,784,000 8,052,000 - 15,836,000
A majority of the Europe revenue, net sales and operating income (loss)
and all of the Europe identifiable assets are attributable to the United
Kingdom.
Research and development is performed both in the United States and
Europe for the benefit of the entire Company and has not been separately
allocated to geographic regions.
42
NOTE 12 - COMMITMENTS:
The Company leases its principal facilities under a long-term operating
lease which expires in March 2001 and includes rent escalations of approximately
4% per annum. The Company also has a long-term operating lease for another
facility which the Company subleases that includes rent escalations not to
exceed 4% in any year. The lease and sublease both expire in April 2001. The
Company recognizes rental expense on a straight line basis over the term of the
leases.
The Company leases a facility in Florida under a lease which expires
in March 2002. The Florida facility is subleased for an amount equal to the
Company's future obligation under the lease.
Future minimum lease payments at December 31, 1999 under operating lease
agreements, net of noncancellable sublease payments of approximately $280,000,
are as follows:
Year Ending December 31,
------------------------
2000 $ 337,000
2001 103,000
2002 25,000
-----------
Total minimum lease payments $ 465,000
===========
Rent expense under operating leases was $438,000, $441,000 and $717,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 13 - LITIGATION
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company. The settlement provides for the dismissal
and release of all claims in these cases in exchange for (a) payment of
$2,500,000 by the Company's insurance carrier to the class of plaintiffs, (b)
issuance by the Company of 2,304,271 shares of its common stock to the
plaintiffs, which is equal to twenty percent of the sum of (i) the number of
shares of common stock currently outstanding and (ii) the maximum number of
shares issuable upon conversion of the Series E Preferred Stock, and (c)
cooperation by the Company with plaintiffs' counsel by providing certain
documents and information regarding the claims asserted in the class actions.
The Company recorded expense of $1,128,000 in connection with this settlement in
1998 based on the average closing market price the week preceding the execution
of the memorandum of understanding for the settlement times the number of shares
of the Company's common stock to be issued in the settlement.
In addition, as a part of the settlement in these class actions, the
Company's former Chairman of the Board, President, and Chief Executive Officer,
Jay V. Tanna, has agreed to forego any claim for unpaid compensation of $131,000
under the Separation Agreement and Release of Claims that Mr. Tanna and the
Company entered into on April 1, 1998, and to surrender his 35,000 shares of
common stock in the Company. Mr. Tanna and the Company also have entered into a
Settlement Agreement and Mutual Release resolving all claims and disputes with
one another, with the exception of certain existing indemnification obligations
under Altris' bylaws, California law, and the indemnity agreement between the
Company and Mr. Tanna related to his services as a director and officer of the
Company.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. Management believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
43
NOTE 14 - SUBSEQUENT EVENT
In December 1999, Spescom acquired the subordinated debt and Series E
Preferred Stock in a separate transaction directly from the Investor (See notes
5 and 8). In January 2000, the Company's Board of Directors agreed to issue to
Spescom 5,285,714 shares of common stock for $3,700,000 in cash, subject to
approval by the Company's shareholders. In addition, the subordinated debt and
Series E convertible preferred stock, along with related accrued interest and
dividends, is to be converted at the rate of $0.70 per share into 9,528,096
shares of common stock.
As part of the transaction, the Company will acquire for $200,000 all
the rights to Spescom's EMS 2000 software, which is currently being integrated
with the Altris eB-Registered Trademark- product. The Company has also agreed to
transfer its remaining 40% share of ASL, with no remaining carrying value, to
Spescom. If the proposed transaction is approved by the Company's shareholders,
Spescom will have the right to nominate two directors to the Company's five
member Board of Directors.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The following table sets forth certain information concerning each
current director of the Company along with information regarding Hilton Isaacman
and Johan Leitner, affiliates of Spescom Limited ("Spescom") who would replace
Messrs. McGovern and Atkinson on the Board if the Company's shareholders approve
the proposed transactions with Spescom:
Name Age Position
- ---------------------------------------- ------------------- -----------------------------------
Roger H. Erickson....................... 43 Chief Executive Officer, Director
D. Ross Hamilton........................ 61 Director
Larry D. Unruh.......................... 48 Director
Michael J. McGovern..................... 71 Director(1)
Martin P. Atkinson...................... 53 Director(1)
Hilton Isaacman......................... 46 Nominated Director(2)
Johan Leitner........................... 46 Nominated Director(2)
- ---------------
(1) Messrs. Atkinson and McGovern are expected to resign upon consummation
of the transactions contemplated by the Stock Purchase Agreement with
Spescom.
(2) To be appointed to the Board upon consummation of the transactions
contemplated by the Stock Purchase Agreement with Spescom to fill the
vacancies created by the anticipated resignations of Messrs.
McGovern and Atkinson.
MR. ERICKSON was appointed the Company's Chief Executive Officer in
April 1998, a position which he previously held from October 1991 to August
1993. In addition, Mr. Erickson was appointed as a Director of the Company in
1998, a position which he previously held from July 1990 to June 1995. Mr.
Erickson has served the Company in various other capacities, including as (i)
Vice President, Strategic Partners, from July 1997 to April 1998, (ii) Vice
President, Operations, from June 1996 to July 1997, (iii) Vice President,
Worldwide Channel Sales, from April 1995 to February 1996, (iv) Vice President,
Alliances and General Manager, PDM Business Unit, from February 1996 to June
1996, (v) Executive Vice President, Marketing and Sales, from September 1993 to
March 1995 and (vi) Vice President, Engineering, from June 1990 to October 1991.
From 1984 until March 1990, Mr. Erickson served the Company in several positions
including Senior Systems Engineer and Director of Technical Projects. Mr.
Erickson earned a M.S. degree in Computer Science from the University of
California, Santa Barbara in 1982 and a B.A. degree in Mathematics from Westmont
College in 1978.
MR. HAMILTON has been a Director of the Company since June 1994. He
served as Chairman of the Board of the Company from January 1997 through June
1997. Since 1983 Mr. Hamilton has served as President of Hamilton Research,
Inc., an investment banking firm. Mr. Hamilton received a B.S. degree in
Economics from Auburn University in 1961.
MR. UNRUH has served as a Director of the Company since May 1988. He is
a partner of Hein & Associates LLP, certified public accountants, and has been
its Managing Tax Partner since 1982. Mr. Unruh currently serves as a director of
Basin Exploration, Inc., an oil exploration and development company. Mr. Unruh
received a B.S.B.A. degree in Accounting from the University of Denver in 1973.
MR. McGOVERN has served as a Director of the Company since he founded
the Company in February 1981, and served as the Company's Chairman and Chief
Executive Officer from its inception until December 1987. Mr. McGovern was a
founder of Autologic, Inc. in 1968, where he was Vice President of Engineering
in charge of developing computer driven photo typesetters for the newspaper and
publishing industries. Mr. McGovern also serves as a director of Qtel, Inc.
(since March 1997) and as a director of Alpha Data Tech. (since
45
April 1997). He received a B.S.E.E. degree from City University of New York in
1952 and an M.S.E.E. degree from Arizona State University in 1959.
MR. ATKINSON has served as a Director of the Company since 1997. Mr.
Atkinson presently runs a consulting firm based in Kent, England that advises
middle-market companies on banking and corporate finance matters. Prior to
establishing his consulting firm, Mr. Atkinson was employed by Lloyds Bank for
28 years until his retirement from there (at the senior executive level) in
December 1996. While at Lloyds, Mr. Atkinson was the Head of Risk Control of
Lloyds Merchant Bank Limited, a Director of Lloyds' Capital Markets Group, where
he was responsible for arranging several multi-million pound syndicated loans,
and from 1992 to 1996, he was responsible for Lloyds' middle-market activities
in certain counties in England. Mr. Atkinson is an Associate of the Institute of
Bankers, England. He received a law degree from Nottingham University in England
in 1968.
MR. ISAACMAN is currently the Director of Corporate Finance of Spescom.
Mr. Isaacman previously served as Spescom's Financial Director from 1990 to
1998. Mr. Isaacman began his career with Spescom in 1988 as Financial Manager
and has been a member of Spescom's Board of Directors since 1990. Mr. Isaacman
received a certificate in accounting, tax and auditing from the University of
Capetown in 1982.
DR. LEITNER has held the position of Director of Strategic Business
Development at Spescom since 1998. Dr. Leitner joined Spescom in 1981 and has
served in various technical and operating capacities within Spescom, including
Group Marketing Director from 1995 to 1997. Since 1987, Dr. Leitner has also
served on the Board of Directors of Spescom. Dr. Leitner earned a BSc in
Engineering in 1975 and a PhD in Electronic Signal Processing in 1979 from the
University of Capetown.
EXECUTIVE OFFICERS
The following table and discussion set forth certain information with
regard to the Company's current executive officers.
Name Age Position
- ---------------------------------------- ------------------- -----------------------------------
Roger H. Erickson................... 43 Chief Executive Officer
Pierre de Wet....................... 36 Vice President, Operations
John W. Low......................... 42 Chief Financial Officer and Secretary
Mark C. Schneider................... 41 Vice President, Engineering
W. Alan Turner...................... 48 Vice President, Marketing
Biographical information for MR. ERICKSON is set forth above.
MR. DE WET was appointed Vice President of Operations in September
1999. Previously, Mr. DeWet served as Director of Operations from April 1998 to
September 1999 and Director of Projects from May 1997 to April 1998. Prior to
joining Altris, Mr. DeWet was a Technical Marketing Manager at Paradigm System
Technology from June 1995 to April 1997 where he was responsible for
establishing relationships with technical partners in Europe and North America.
From April 1991 to June 1995, Mr. DeWet was with PQ Africa, a division of
Comparex Holdings. Mr. DeWet earned his B.S. from the University of Pretoria in
1989.
MR. LOW has served as Chief Financial Officer and Secretary since June
1990. Previously, Mr. Low had served as Corporate Controller since joining the
Company in August 1987. From 1980 until joining the Company, Mr. Low was with
Price Waterhouse LLP, most recently as a Manager working with middle-market and
growing companies. Mr. Low, who is a certified public accountant, earned a B.A.
degree in Economics from the University of California, Los Angeles in 1978.
MR. SCHNEIDER was appointed Vice President of Engineering in January
2000. He has held many positions since joining the Company in 1985 as an
Electronic Design Engineer. From June 1999 to January 2000, Mr. Schneider served
as acting Vice President of Engineering until his formal appointment.
Previously, Mr. Schneider was Senior Software Engineer from 1998 to 1999 and
Project Lead from 1996 to 1997. Prior to 1996, Mr. Schneider served as a Manager
of Workstation Products and Software Engineer. Before joining the
46
Company, Mr. Schneider was an Electronic Design Engineer with Teledyne
Electronics. Mr. Schneider earned a Bachelor of Science degree in Electrical
Engineering from California State University, Northridge in 1981.
MR. TURNER was appointed Vice President of Marketing in March of 1998.
Since joining the Company, Mr. Turner served as Vice President of Channel Sales
from 1997 to 1998 and as Business Development Director from 1993 to 1997.
Previously, Mr. Turner was in the offshore oil industry, heading teams of
engineers in product design, analysis and testing. Mr. Turner received a BSc
degree in Mechanical Engineering from Heriot-Watt University, Edinburgh,
Scotland in 1974, and received a postgraduate degree in Engineering Design from
Loughborough University, England in 1977.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "EXCHANGE
ACT") requires the Company's executive officers and directors and persons who
own more than 10% of the Company's common stock to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission (the "SEC"). Executive officers, directors and 10% shareholders are
required by the SEC to furnish the Company with copies of all Forms 3, 4 and 5
that they file.
Based solely on the Company's review of the copies of such forms it has
received and representations from certain reporting persons that they were not
required to file a Form 5 for specified fiscal years, the Company believes that
all of its executive officers, directors and greater than 10% shareholders have
complied with all of the filing requirements applicable to them with respect to
transactions during 1999, except that Form 3s were not timely filed for Mr.
Turner and Mr. de Wet, though they have been subsequently filed.
47
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information concerning the
annual and long-term compensation for services rendered in all capacities to the
Company for the three years ended December 31, 1999 of (i) the Company's Chief
Executive Officer and (ii) the five other most highly compensated executive
officers having compensation of $100,000 or more during 1999 (collectively, the
"NAMED EXECUTIVE OFFICERS").
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------
Long-term
Other Compensation
Annual Awards--
Bonus Compensation Stock Options
Name and Position Year Salary($) ($) ($)(1) (# Shares)
- ----------------------------------- ------ --------------- ---------- --------------- -------------
Roger H. Erickson 1999 $196,999(2) $50,000 - 55,000
Chief Executive Officer 1998 164,635 - $131,215(3) 65,000
1997 174,708 9,000 - -
Steven D. Clark 1999 $102,842 - - -
Former Vice President -- 1998 125,200 - $ 14,067(7) 38,000
Sales(5) 1997 168,462 $25,000 - 40,000
Pierre de Wet 1999 $112,692 $ 3,500 - 52,000
Vice President -- 1998 106,450 - - 23,000
Operations 1997 54,596 - - -
John W. Low 1999 $147,000(2) $ 7,000 - 47,000
Chief Financial Officer 1998 147,000 - $100,245(4) 28,000
and Secretary 1997 149,639 - - -
Mark C. Schneider 1999 $101,847 - - 46,500
Vice President -- 1998 93,981 - - -
Engineering(6) 1997 82,580 - - 2,000
Alan Turner 1999 $112,465 $ 3,500 - 54,500
Vice President -- 1998 104,759 - - 20,000
Marketing 1997 109,992 30,000 - -
- -----------
(1) Excludes compensation in the form of other personal benefits, which, other
than as set forth in the table above, did not exceed the lesser of $50,000
or 10% of the total annual salary and bonus reported for each year.
(2) The 1999 salary for Mr. Erickson and Mr. Low includes $27,692 and $8,654,
respectively, of which they voluntarily deferred payment until 2000 to
assist the Company in managing its cash flow.
(3) This comprises (i) $105,843 relating to forgiveness of a promissory note
that had been made by Mr. Erickson in favor of the Company in connection
with his exercise of stock options that were due to expire and (ii) $25,372
in commissions paid in 1998 relating to Mr. Erickson's position as Vice
President, Strategic Partners in 1997.
(4) This comprises (i) $70,562 relating to forgiveness of a promissory note
that had been made by Mr. Low in favor of the Company in connection with
his exercise of stock options that were due to expire and (ii) a $29,683
payment for accrued vacation.
(5) Mr. Clark resigned from the Company in August 1999. The bonus paid in 1997
related to services provided in 1996 as Director of U.S. Sales.
48
(6) Mr. Schneider was appointed an executive officer of the Company in January
2000. From June 1999 until his appointment, Mr. Schneider served as acting
Vice President of Engineering.
(7) These payments were for sales commissions.
OPTION GRANTS IN 1999
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1999:
Number of % of Total Potential Realizable Value
Securities Options At Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation
Options Employees in Price Expiration for Option Term (2)
--------------------------
Name Granted(#)(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -------------------------- -------------- ------------- ------------ ------------- ------------- ------------
Roger H. Erickson.... 20,000(3) 3% $0.75 5/10/09 $9,433 $23,906
35,000(4) 5% $0.56 11/15/09 $12,370 $31,349
Steven D. Clark...... - - - - - -
Pierre de Wet........ 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
32,000(4) 4% $0.56 11/15/09 $11,310 $28,662
John W. Low.......... 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
27,000(4) 4% $0.56 11/15/09 $9,543 $24,183
Mark C. Schneider.... 6,000(6) 1% $0.35 1/20/09 $1,321 $3,347
5,000(5) 1% $0.50 8/5/09 $1,572 $3,984
35,500(4) 5% $0.56 11/15/09 $12,547 $31,797
W. Alan Turner....... 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
34,500(4) 5% $0.56 11/15/09 $12,194 $30,901
- ----------------
(1) All options were granted with an exercise price equal to the closing sale
price of the Common Stock as reported on the OTC Bulletin Board on the date
of grant.
(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of its Common Stock.
The actual value, if any, which a Named Executive Officer may realize upon
the exercise of stock options will be based upon the difference between the
market price of the Common Stock on the date of exercise and the exercise
price.
(3) Options were granted in May 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
(4) Options were granted in November 1999. The options vest 25% 90 days from
the date of grant and in additional annual installments of 25% commencing
on the first anniversary of the date of grant.
(5) Options were granted in August 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
(6) Options were granted in January 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
49
AGGREGATED OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table sets forth for the Named Executive Officers
information with respect to unexercised options and year-end option values, in
each case with respect to options to purchase shares of the Company's Common
Stock. Other than Steven D. Clark, who acquired 30,000 shares upon the exercise
of options and realized a value of $11,250 (based upon the market price of
$0.625 per share on November 9, 1999, the date of exercise), the Named Executive
Officers did not exercise any options in 1999.
Value of Unexercised
Number of Unexercised Options in-the-money Options
Held as of December 31, 1999 at December 31, 1999(1)
--------------------------------- -------------------------------
Name Exercisable Nonexercisable Exercisable Nonexercisable
- -------------------------------- ----------------- -------------------- ----------------- ----------------
Roger H. Erickson............... 62,500 57,500 $24,098 $ 6,158
Steven D. Clark................. 0 0 0 0
Pierre De Wet................... 16,500 58,500 $ 4,972 $12,144
John W. Low..................... 64,000 46,000 $10,822 $ 7,854
Mark Schneider.................. 5,250 44,750 $918 $ 8,105
W. Alan Turner.................. 15,500 59,500 $ 4,833 $12,395
----------
(1) Based on the closing sale price of the Common Stock on the OTC Bulletin
Board on December 31, 1999 ($0.72 per share).
COMPENSATION OF DIRECTORS
Each director, other than directors who are also employees of the
Company or are precluded from accepting a fee by their employers, receives a
$5,000 annual fee plus a $1,000 meeting fee for four paid meetings a year. In
addition, each director is reimbursed for all reasonable expenses incurred in
connection with attendance at such meetings. As a result of the Company's
current cash constraints, the directors have agreed to the deferral of all
annual and meeting fees until the Company's financial position improves.
Directors who are employees of the Company are not compensated for serving as
directors.
Mr. Unruh, a director, provided consulting services to the Company in
1999 for which he received $5,244.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1999, the Compensation Committee of the Board of Directors was
comprised of three members, Messrs. McGovern, Hamilton and Atkinson, none of
whom is or was an employee or officer of the Company in 1999. No executive
officer of the Company has served as a member of the Board of Directors or
Compensation Committee of any company in which Messrs. McGovern, Hamilton and
Atkinson is an executive officer.
50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT
The following table sets forth information as to shares of the Common
Stock beneficially owned as of February 14, 2000, on both an actual and a pro
forma basis giving effect to the consummation of the proposed transactions with
Spescom, by:
- each of the five current directors and the two Spescom affiliates
who would be appointed to the Board of Directors upon
consummation of the transactions to replace Messrs. McGovern and
Atkinson upon their resignation from the Board, as discussed
below,
- the Company's Chief Executive Officer and each of its other
executive officers,
- all directors and executive officers as a group and
- each person who, to the extent known to the Company, beneficially
owns more than 5% of the outstanding shares of Common Stock.
Unless otherwise indicated in the footnotes following the table, the
persons as to whom the information is given have sole voting and investment
power over the shares shown as beneficially owned, subject to community property
laws where applicable.
Actual Pro Forma
------------------------------- ------------------------------
Number of Percent of Number of Percent of
Name Shares (1) Class (1) Shares (1) Class (1)
- ---- --------------- --------------- ---------------- --------------
Roger H. Erickson........................ 132,250 1.0% 132,250 *
Pierre de Wet............................ 24,500 * 24,500 *
John W. Low.............................. 107,750 * 107,750 *
Mark C. Schneider........................ 15,625 * 15,625 *
W. Alan Turner........................... 55,125 * 55,125 *
D. Ross Hamilton......................... 186,500 1.4% 186,500 *
Michael J. McGovern...................... 353,251 2.7% 353,251 1.3%
Larry D. Unruh........................... 11,797 * 11,797 *
Martin P. Atkinson....................... 7,500 * 7,500 *
Hilton Isaacman(2)....................... 5,529,952(3) 40.0% 18,542,381 65.7%
Johan Leitner(2)......................... 5,529,952(3) 40.0% 18,542,381 65.7%
Spescom Limited.......................... 5,529,952(3) 40.0% 18,542,381 65.7%
All directors and executive officers
as a group (9 persons)................ 894,298 6.7% 894,298 3.2%
- -----------
* Less than one percent.
(1) Amounts and percentages include shares of Common Stock that may be acquired
within 60 days of February 14, 2000 through the exercise of stock options
as follows: 71,250 shares for Mr. Erickson, 24,500 shares for Mr. de Wet,
60,750 shares for Mr. Low, 15,625 shares for Mr. Schneider, 24,125 shares
for Mr. Turner, 7,500 shares for Mr. McGovern, 7,500 shares for Mr. Unruh,
7,500 shares for Mr. Atkinson and 218,125 shares for all directors and
executive officers as a group.
(2) As affiliates of Spescom, Messrs. Isaacman and Leitner could be deemed
beneficial owners of the shares of Common Stock owned by Spescom Limited.
However, Messrs. Isaacman and Leitner disclaim beneficial ownership of all
such shares.
(3) Amount includes (i) 1,801,381 shares of Common Stock issuable upon
conversion of Series E Convertible Preferred Stock having a conversion
price of $1.90 per share and (ii) 300,000 shares of Common Stock issuable
upon exercise of a warrant having an exercise price of $1.90 per share.
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Isaacman and Leitner, who will become directors of the Company
if the proposed transactions with Spescom are approved by the Company's
shareholders, are affiliates of Spescom. As discussed above, the Company and
Spescom concluded the May 1999 Transactions, whereby Spescom purchased 2,000,000
shares of the Company's common stock for $1.8 million. In addition, as part of
the agreement, Spescom paid the Company an additional $1.0 million and invested
$1.2 million directly into Altris U.K. for a 60% interest in Altris U.K. In
conjunction with the agreement the Company contributed $400,000 to Altris U.K.
and retained a 40% ownership interest in Altris U.K. The Company also applied
$200,000 of the proceeds from the transaction to fund an escrow account which
was to remain in effect until the second anniversary of the closing date for the
purpose of securing any obligations owed by the Company to Spescom under the
stock purchase agreement, including any liability the Company may have under its
representations and warranties to Spescom in the agreement. The Company also
recorded a deferred gain of $200,000 relating to the funds escrowed. In November
1999, Spescom released the $200,000 in escrow. The Company's deferred gain is
being recognized over the warranty period. In 1999, the Company recorded a gain
of $257,000, net of expenses on the transaction.
Other terms of the transaction included that Spescom has the right to
nominate one director to the Company's board of directors. In addition, the
shares of stock representing the Company's 40% interest in Altris U.K. have been
pledged to Spescom to secure the obligations of the Company to Spescom, such
pledge not to extend beyond the second anniversary of the closing date.
In addition, the Company entered into a distribution agreement with
Altris U.K. which grants Altris U.K. exclusive distribution rights for the
Company's products around the world excluding North and South America and the
Caribbean. Under the distribution agreement, the exclusivity is contingent on
Altris U.K. meeting certain minimum royalty commitments beginning in 2002. The
agreement provides for a royalty to the Company on sales of the Company's
products by Altris U.K. In 1999 royalties to the Company totaled $188,000. At
December 31, 1999, the Company had a receivable from Altris U.K. in the amount
of $44,000.
As part of the May 1999 transaction with Spescom, the Company became
Spescom's exclusive distributor of EMS 2000, Spescom's configuration management
(CM) product, in North and South America and the Caribbean. In 1999, the Company
purchased software and services from Spescom totaling $146,000. At December 31,
1999 the Company had a payable to Spescom of $50,000.
In addition, as discussed above, the Company borrowed $500,000 from
Spescom in September 1999 under a loan which was convertible into Common Stock
of the Company at Spescom's option on or before January 1, 2000 at $0.35 per
share. The Company issued 1,428,571 shares of Common Stock to Spescom after
Spescom elected to convert this loan.
Spescom acquired from Finova Mezzanine Capital, Inc. the Company's
11.5% Subordinated Debenture (later adjusted to 12.0%) in the principal amount
of $3,000,000 issued by the Company on June 27, 1997, 3,000 shares of the Series
E Preferred Stock, and certain other securities and agreements, including a
warrant agreement to purchase 300,000 shares of the Company's Common Stock at
$1.90 per share (collectively, the "Finova Instruments"), for approximately
$1.25 million plus the transaction costs, including legal fees of counsel for
Finova Mezzanine Capital, Inc. The 9,528,096 shares of Common Stock in exchange
for the Finova Instruments plus accrued dividends and interest as converted
represents the face value of the Finova Instruments into Common Stock at a
valuation of $0.70 per share, the same valuation applied for the issuance of
5,285,714 shares for $3,700,000 in cash.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES, AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to the Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) EXHIBITS:
3.1* Registrant's Articles of Incorporation, as amended
3.2* Registrant's Bylaws, as amended
4.1* Specimen Certificate of Common Stock
4.2* Specimen Certificate of Redeemable Common Stock Purchase Warrant
4.3* Certificate of Determination of Series D Convertible Preferred
Stock of the Company
4.4* 11.5% Subordinated Debenture due June 27, 2002 in principal
amount of $3,000,000 issued by the Altris Software, Inc. to
Sirrom Capital Corporation, d/b/a/ Tandem Capital on June 27,
1997
4.5* Certificate of Determination of Series E Convertible Preferred
Stock of the Company
10.1* Purchase Agreement dated as of April 10, 1986, between
Registrant and Lockheed Corporation, including form of Cross
License Agreement and Shareholder Agreement
10.2* Purchase Agreement dated as of August 26, 1986, between
Registrant and Lockheed Corporation
10.3* 1987 Stock Option Plan, as amended April 27, 1994
10.4* Forms of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement under 1987 Stock Option Plan
10.5* Amended and Restated 1996 Stock Incentive Plan
10.6* Form of Incentive Stock Option Agreement, Nonstatutory Stock
Option Agreement and Restricted Stock Agreement under Amended
and Restated 1996 Stock Incentive Plan
10.7* Form of Indemnification Agreement with officers and directors
10.8* Sublease Agreement dated August 31, 1992 between the Company and
Unisys Corporation
53
10.12* Standard Industrial Lease dated April 1, 1994 between the
Company and Utah State Retirement Fund, a common trust fund
10.13* WCMA and Term Loan Agreement dated October 22, 1996 between
Altris Software, Inc. and Merrill Lynch Business Financial
Services, Inc.
10.14* Convertible Preferred Stock Purchase Agreement, dated as of
June 27, 1997, by and between the Altris Software Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.15* Debenture Purchase Agreement, dated as of June 27, 1997, by and
between Altris Software, Inc. and Sirrom Capital Corporation,
d/b/a/ Tandem Capital
10.16* Registration Rights Agreement, dated as of June 27, 1997, by
and between Altris Software Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
10.17* First Amendment to Debenture Purchase Agreement, dated as of
November 1, 1998, by and between Altris Software Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.18* First Amendment to Subordinated Debenture, dated as of November
1, 1998, by and between Altris Software Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
10.19* Altris Software, Inc. Securities Litigation Memorandum of
Understanding, as of March 1999.
10.20* Security Agreement, dated as of January 22, 1999, by and
between Altris Software Inc. and Sirrom Capital Corporation,
d/b/a/ Tandem Capital
10.21* Agreement between Spescom Limited, Spescom CIT (Pty) Limited,
Altris Software, Inc., Altris International Limited, Altris
Group Plc, and Altris Software Limited, dated May 7, 1999.
10.22* First Amendment to Convertible Preferred Stock Purchase
Agreement dated, May 7, 1999, by and between the Company and
Finova Mezzanine Capital, Inc.
10.23* Second Amendment to Debenture Purchase Agreement dated, May 7,
1999, by and between the Company and Finova Mezzanine Capital,
Inc.
10.24* Second Amendment to Subordinated Debenture, dated May 7, 1999,
by and between the Company and Finova Mezzanine Capital, Inc.
10.25* Release Agreement, dated May 7, 1999, by and between the
Company and Finova Mezzanine Capital, Inc.
10.26* Stock Purchase Agreement, dated January 14, 2000, by and
between the Company and Spescom Limited
21 Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of PricewaterhouseCoopers LLP
54
27 Requirements for the Format and Input of Financial Data Schedules
(b) REPORTS ON FORM 8-K
-------------------
No Reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
- ----------
*Incorporated herein by this reference from previous filings with the Securities
and Exchange Commission.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San
Diego, State of California, on March 27, 2000.
ALTRIS SOFTWARE, INC.
By: /s/Roger H. Erickson
---------------------------
Roger H. Erickson
Chief Executive Officer
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 in the capacities and on the dates indicated.
/s/ Roger H. Erickson Director and Chief Executive March 27, 2000
- ---------------------------
Roger H. Erickson Officer (Principal Executive Officer)
/S/ JOHN W. LOW Chief Financial Officer and Secretary March 27, 2000
- ---------------------------
John W. Low (Principal Financial and Accounting Officer)
/s/ Martin Atkinson Director March 27, 2000
- ---------------------------
Martin Atkinson
/s/ D. Ross Hamilton Director March 27, 2000
- ---------------------------
D. Ross Hamilton
/s/ Michael J. McGovern Director March 27, 2000
- ---------------------------
Michael J. McGovern
/s/ Larry H. Unruh Director March 27, 2000
- ---------------------------
Larry D. Unruh
56
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALTRIS SOFTWARE, INC.
===================================================================================================================
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Charged to
Description Balance At Charged to Other Balance At
Beginning Costs and Accounts - Deductions - End of
of Period Expenses Describe Describe Period
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 194,000 $ 30,000 $ (155,000)(a) $ 69,000
Excess inventory reserve $ 651,000 $ 269,000(b) $ 920,000
Tax benefit reserve $ 20,304,000 $ (516,000)(c) $19,788,000
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 285,000 $ 133,000 $ (224,000)(a) $ 194,000
Excess inventory reserve $ 511,000 $ 140,000 $ 651,000
Tax benefit reserve $ 18,523,000 $1,781,000(c) $20,304,000
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 171,000 $ 259,000 $ (145,000)(a) $ 285,000
Excess inventory reserve $ 552,000 $ 50,000 $ (91,000)(b) $ 511,000
Tax benefit reserve $ 17,262,000 $1,261,000(c) $18,523,000
===================================================================================================================
(a) Amount written off
(b) Inventory scrapped or sold at less than cost
(c) Valuation allowance against benefit recorded
57