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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, 1998
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.
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(Exact name of registrant as specified in its charter)
California 95-3634089
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9339 Carroll Park Drive, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on of each class
Title of each class which registered
- ------------------- --------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
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(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
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(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 March 23, 1999,
held by non-affiliates* of the Registrant, based upon the last price reported on
the OTC Bulletin Board on such date was $9,614,663.
The number of shares outstanding of the Registrant's Common Stock at
the close of business on March 23, 1999, was 9,614,663.
*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, 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.
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. The Company received net proceeds of approximately $2,600,000 upon
issuing 750,000 units at a unit price of $4.25. In January 1992, the underwriter
in the unit offering exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. Each unit consisted of
two shares of the Company's common stock and one warrant to purchase one share
of common stock at an exercise price of $4.25. In 1995, such underwriter
exercised warrants which were issued to it in connection with the offering for
net proceeds of $382,000. Also in 1995, warrants were exercised for 459,446
shares of common stock, resulting in total proceeds to the Company of
$3,848,000.
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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 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 Series D 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 $6.00 per share (subject to reset on June 27, 1999 to
the average closing price of the common stock on the 20 trading days immediately
prior to June 27, 1999 if such average is less than $6.00 per share). The
Company may redeem any or all of the Series D 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 D Preferred Stock on or after June 27, 2002 at
its stated value irrespective of the trading price of its common stock. 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.
As the Company is currently in default under the Preferred Stock Purchase
Agreement as a result of non-payment of dividends due in 1998, the dividend rate
on the Series D 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".
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
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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") or wide area networks
("WANs"). 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 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 addition, organizations also consider user related issues such as the
ability to search, retrieve, view, annotate and edit data in a controlled
manner.
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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 and 98, Windows NT 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 and enhancing tools that allow users to customize the graphical user
interfaces ("GUIs"), layout and menu
4
items to fit their own needs; (ii) designing additional APIs to simplify
tailoring by both users and application developers; and (iii) providing users
with administrative tools that enable systems operators to monitor individual
use, network traffic and printing volume.
In March 1999, the Company released its Altris EB-TM- 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 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 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.
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 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
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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.
As of March 23, 1999, the Company's sales and marketing organization
consisted of 18 employees primarily based in Company sales offices located in
the U.S. and in London, England. 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.
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%, 18% and 19% of the Company's total revenue for the years ended December 31,
1998, 1997 and 1996, respectively.
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The Company's strategy is to continue 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 Koren Projects Management
Alpha Numeric Solutions Manage IT bpr Norge
CACI Information Systems Modul 1 Data
CAD Capture Prisma Imaging
Data General QSP Financial Information Systems
Datel Group SAIC
Deverill Plc SMARTtech
Excitech Computers Spescom
Fullmark Micro Staffware
GE Capital Consulting Systems Team
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.
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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 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,
8
including CD-ROM, magnetic disk, optical disks and a
redundant array of inexpensive disks ("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-TM- The Company's Altris EB 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 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 EB Business Objects 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, 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 and LANs 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, layout and menu items of the EDMS
to fit their own needs, designing additional APIs to simplify tailoring by
both users and application developers and administrative tools to enable
systems operators to monitor individual use, network traffic and printing
volume. The Company also intends to continue to enhance the performance of
its current products, including advancing its TIE-Technology to work with
larger and more complex documents, adopting parallel three-tier architecture
and also developing tools to reduce telecommunication expenses for the
distribution and replication of data over
10
geographically dispersed systems. Through leveraging its technology, the Company
also plans to introduce new products and product extensions which are
complementary to its existing suite of products and which address both existing
and emerging market needs, including expanding the applications for its
document-enabling capabilities and its TIE-Technology.
In 1998, 1997 and 1996, the Company's research and product
development expenses were approximately $2,314,000, $4,155,000 and $3,363,000,
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. Technical expenses which include project management,
installation, project design specification and other project related expenses,
included in cost of revenues were $2,328,000, $2,786,000 and $2,607,000 for
1998, 1997 and 1996, respectively.
In 1998 the Company continued its work to reengineer the initial
release of Altris EB. Version 11 of EB 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 with new features such as extended web
functionality. The Company also intends to add records management capabilities
to Altris EB 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
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 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 product will receive
market acceptance. The Company's product development efforts with respect to
Altris EB 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 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
11
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 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, 1998,
the Company's contract backlog was $7,491,000, as compared to $9,610,000 at
December 31, 1997. The Company expects $5,303,000 of the December 31, 1998
backlog to be completed in 1999, as compared to $8,210,000, of the December 31,
1997 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
12
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.
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 March 23, 1999, the Company had 85 full-time employees, of
whom 46 were engaged in product development and application engineering
activities, 12 in customer support and implementation, 18 in sales and marketing
and 9 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 experienced no 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.
13
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 $12,349, subject to annual adjustments not to exceed 4% in any year.
The Company's United Kingdom subsidiary leases a facility which
occupies 18,000 square feet in Ealing, London. The term of the lease is through
March 2001. The monthly rent is $20,006.
The Company also leases a facility in Florida under a lease which
expires in 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.
ITEM 3. LEGAL PROCEEDINGS
Between March 16, 1998 and May 1, 1998, six complaints alleging
violations of the federal securities laws were filed against the Company and
certain of its present and former officers and directors in the United States
District Court for the Southern District of California. The complaints are
purported class actions filed by individuals who allege that they purchased the
Company's stock during the purported class periods. On September 11, 1998, the
court entered an order consolidating these cases, appointing lead plaintiffs and
approving plaintiffs' selection of lead counsel. On October 29, 1998, the lead
plaintiffs filed a Consolidated Amended Class Action Complaint For Violation of
The Federal Securities Laws And The California Corporations Code.
The consolidated amended complaint asserts claims for violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder and sections 25400 and 25500 of the California
Corporations Code against the Company, Jay V. Tanna, John W. Low and Price
Waterhouse LLP on behalf of persons who purchased the Company's stock between
April 17, 1996 and March 11, 1998. The complaint seeks certification as a class
action, compensatory damages in an unspecified amount, prejudgment and
postjudgment interest, attorneys fees, expert witness fees and other costs, and
unspecified extraordinary equitable and/or injunctive relief.
On March 3, 1999, the Company entered into a Memorandum of
Understanding providing for the settlement of these class actions. The
Memorandum of Understanding provides that in exchange for the dismissal and
release of all claims in these cases, (a) the Company's insurance carrier will
pay $2,500,000 to the class of plaintiffs, (b) the Company will issue to the
plaintiffs 2,304,271 shares of its common stock, 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 D convertible Preferred Stock, and (c) the Company will cooperate
with plaintiffs' counsel by providing certain documents and information
regarding the claims asserted in the class actions. The settlement is subject to
certain conditions, including the execution of a stipulation of settlement,
notice to the class and approval by the court.
On April 1, 1998, Altris' former Chairman of the Board, President
and Chief Executive Officer, Jay V. Tanna and Altris entered into a Separation
Agreement and Release of Claims providing Mr. Tanna with $215,000 of
compensation to be paid over the course of one year. As part of the settlement
of these class actions, Mr. Tanna has agreed to forego any claim for the unpaid
compensation of $131,000 relating to the Separation Agreement and Release of
Claims and to surrender his 35,000 shares of common stock. Mr. Tanna and Altris
also have agreed to execute a Settlement Agreement and Mutual Release resolving
all claims and disputes with one another, with the exception of certain existing
indemnification obligations under
14
Altris' bylaws, California law, and the indemnity agreement between Altris
and Mr. Tanna related to his services as a director and officer of Altris.
On July 13, 1998, the Securities and Exchange Commission issued a
formal order of investigation authorizing its staff to examine the financial
statements filed in Altris' Forms 10-Q for the first three quarters of 1996 and
1997, and on the Form 10-K for the year ended December 31, 1996. All of the
financial statements in question have previously been restated. The Company is
cooperating fully in this matter.
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 Company did not submit any matters to a vote of security holders
during the fourth quarter of 1998.
15
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, 1996 High Low
---- ---
First Quarter . . . . . . . . . . . $13.88 $7.26
Second Quarter . . . . . . . . . . . 18.00 8.76
Third Quarter. . . . . . . . . . . . 12.50 7.38
Fourth Quarter . . . . . . . . . . . 10.63 5.75
YEAR ENDED DECEMBER 31, 1997
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 .37
Third Quarter. . . . . . . . . . . . 1.00 .25
Fourth Quarter . . . . . . . . . . . .65 .29
The stock prices listed above have been restated to reflect the
one-for-two reverse stock split effected by the Company on October 25, 1996.
On March 23, 1999, there were approximately 453 holders of record of
the Company's Common Stock and the last sale price of the Common Stock as
reported on the Nasdaq National Market on March 23, 1999 was $1.00 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% 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. A summary of certain terms of the private placement is set forth
below.
CONVERTIBLE PREFERRED STOCK. The Series D 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 $6.00 per share (subject
to reset on June 27, 1999 to the average closing price of the common stock on
the 20 trading days immediately prior to June 27, 1999 if such average is less
than $6.00 per share). The Company may redeem any or all of the Series D
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,
16
and the Company may redeem any or all of the Series D 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 default exists under the purchase agreement
governing the issuance of the Series D 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, the dividend rate on the
Series D 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, 1998
accumulated unpaid dividends amounted to $350,000. 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 D Preferred Stock remains outstanding on each of the following dates: (i)
50,000 shares, at an exercise price of $7.00 per share, on June 27, 2000 if the
Series D 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,
on June 27, 2001 if the Series D 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 D 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 D 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. 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 D Preferred Stock, when added to all
other shares of common stock issued upon conversion of the Series D 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 D Preferred Stock resulting in the
issuance of shares of common stock up to the Issuable Maximum, and the remaining
portion of the Series D 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 D Preferred Stock.
REGISTRATION RIGHTS. In connection with the issuance of the Series D
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.
17
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, 1998 have been derived from the audited Consolidated
Financial Statements. The results of Trimco are included below since December
27, 1995, the date of the acquisition.
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 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except per share data)
Revenues $ 12,803 $ 17,773 $ 19,549 $ 12,731 $ 9,547
Cost of revenues 7,027 9,383 9,540 5,791 4,822
-------- -------- -------- -------- --------
Gross profit 5,776 8,390 10,009 6,940 4,725
-------- -------- -------- -------- --------
Operating expenses:
Research and development 2,314 4,155 3,363 1,402 769
Marketing and sales 4,385 8,179 5,581 3,570 2,627
General and administrative 5,083 4,241 3,077 1,581 1,146
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 -- --
-------- -------- -------- -------- --------
13,535 16,765 12,431 18,812 4,542
-------- -------- -------- -------- --------
(Loss) income from operations (7,759) (8,375) (2,422) (11,872) 183
Interest and other income 31 383 88 137 207
Interest and other expense (664) (447) (114) (95) (115)
-------- -------- -------- -------- --------
Net (loss) income $ (8,392) $ (8,439) $ (2,448) $(11,830) $ 275
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic net (loss) income per common share $ (.92) $ (.90) $ (.26) $ (1.68) $ 0.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted net (loss) income per common share $ (.92) $ (.90) $ (.26) $ (1.68) $ 0.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing basic net (loss)
per common share 9,615 9,585 9,250 7,026 6,992
Shares used in computing diluted net (loss)
income per common share 9,615 9,585 9,250 7,026 7,127
At December 31,
----------------------------------------------------------
Consolidated Balance Sheet Data 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
Working capital (deficit) $ (6,509) $ (1,977) $ 2,064 $ 939 $ 2,799
Total assets 11,366 15,836 18,260 19,002 9,771
Long-term obligations 6,453 2,920 1,966 1,420 --
Mandatorily redeemable convertible
preferred stock 3,003 2,682 -- -- --
Shareholders' (deficit) equity (6,778) 2,048 9,863 8,116 5,658
18
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,
-------------------------------------
1998 1997 1996
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 54.9 52.8 48.8
------- ------- --------
Gross profit 45.1 47.2 51.2
------- ------- --------
Operating expenses:
Research and development 18.1 23.4 17.2
Marketing and sales 34.2 46.0 28.5
General and administrative 39.7 23.9 15.8
Settlement of lawsuits 8.8 - -
Write off of capitalized software 4.9 - -
Write down of assets to net realizable value - 1.0 -
Loss on office closure - - 2.1
------- ------- --------
105.7 94.3 63.6
------- ------- --------
Loss from operations (60.6) (47.1) (12.4)
Interest and other income .2 2.1 .5
Interest and other expense (5.1) (2.5) (.6)
------- ------- --------
Net loss (65.5)% (47.5)% (12.5)%
------- ------- --------
------- ------- --------
REVENUES
Revenues were $12,803,000, $17,773,000 and $19,549,000 for 1998,
1997 and 1996, respectively. The decrease of $4,970,000 in 1998 compared to 1997
is primarily due to a decline in sales of new large systems. The decrease of
$1,776,000 in 1997 compared to 1996 was the result of a decline in sales of new
large systems, which was partially offset by an increase in revenues from system
enhancements, expansions and maintenance.
19
New systems revenues in 1998, 1997, and 1996 were $4,044,000 (32%),
$6,839,000 (38%), $10,262,000 (52%), respectively, while revenues from system
enhancements, expansion and maintenance were $8,759,000 (68%), $10,934,000 (62%)
and $9,287,000 (48%), respectively. System enhancements are changes to a system
previously installed by the Company 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 the
customer's general data processing environment. See "Item 1. Business - Sales
and Marketing".
In 1998 and 1997, revenues from new systems decreased $2,795,000 and
$3,423,000, respectively from the previous year. Management believes that the
Company's inability to provide the Altris EB product as originally planned in
1997, which was to address the needs of new customers for additional features
and functionality, was the principal cause for the decline in new systems
revenue in 1998 and 1997. See "Item 1. Business-Development". In addition, the
decline in new system revenues from 1996 to 1997 was due to a sale of one
substantial system which accounted for 12% of total revenues in 1996, whereas in
1998 and 1997 no sale exceeded 10%. In 1998, revenues from system enhancements,
expansion and maintenance decreased $2,175,000 from 1997. In 1997, revenues
generated from system enhancements, expansion and maintenance increased
$1,647,000 over 1996. Management believes the decrease in 1998 was largely due
to the delay in the introduction of Altris EB and customers' uncertainty
regarding the financial condition of the Company. 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.
A small number of customers has typically accounted for a large
percentage of the Company's annual revenues. One consequence of this has been
that revenues can fluctuate significantly on a quarterly basis. 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 45%, 47% and 51% for
1998, 1997 and 1996, respectively. The decrease in gross profit margin in 1998
from 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. Software license
revenues were $4,189,000, $8,154,000, and $9,554,000 in 1998, 1997 and 1996,
respectively, representing 33%, 46%, and 49% of revenues, respectively. The
decline in software license revenues and related cost of license revenues
generated from software sales in 1998 from 1997 was due to declines in sales
generated from new systems and system expansions. Service revenues, which
include maintenance, training and consulting services, decreased to $7,786,000
in 1998 from $7,969,000 in 1997. Hardware sales, which have a lower margin than
software and services, decreased from $1,837,000 in 1996 to $1,650,000 in 1997
to $828,000 in 1998. 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 quarterly based on the
revenue mix of Company software, services, proprietary hardware and third party
software or hardware.
OPERATING EXPENSES
Research and development expense was $2,314,000, $4,155,000, and
$3,363,000 for 1998, 1997 and 1996, respectively. Research and development
decreased $1,841,000 due in part to a reduction of personnel in 1998 from 1997.
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
20
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 $4,385,000, $8,179,000, and
$5,581,000 for 1998, 1997 and 1996, respectively. As a result of the delay in
releasing Altris EB, the Company's next generation document management software,
the Company reduced marketing and promotional costs and personnel, resulting in
a reduction of $3,794,000 in marketing and sales expense in 1998 compared to
1997. In 1997 in connection with the initial marketing of the new Altris EB
product suite, and efforts to increase name recognition for the new "Altris"
name which the Company adopted in October of 1996, the Company incurred
substantial marketing and promotional costs. The increase from 1996 to 1997 was
primarily due to these promotions and additional sales and support personnel
hired and related costs associated therewith.
General and administrative expense was $5,083,000, $4,241,000, and
$3,077,000 for 1998, 1997 and 1996, respectively. The increase from 1997 to 1998
was primarily due to increased legal, accounting and consultancy costs
associated with the Company's restatement of its financial statements for fiscal
year 1996 and the three interim quarters in 1997 and the resulting securities
class action lawsuits. In addition, during 1998 the Company incurred $611,000 in
charges resulting primarily from severance costs, including amounts owed under a
Separation Agreement between the Company and its former CEO. In addition, during
the fourth quarter of 1998, the Company reduced the life of the goodwill
associated with its London 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.
Goodwill amortization expense in 1998 increased $450,000 as a result of the
change in the remaining estimated useful life of the goodwill. The increase from
1996 to 1997 was due primarily to expenses associated with an increase in the
allowance for doubtful accounts, a contract dispute and an increase in legal and
professional fees, goodwill amortization, and investor relations expenses. In
addition, during the second quarter of 1997, the Company wrote off certain
offering costs, resulting in a one-time charge to operations in the amount of
$270,000. The costs that were written off were not directly related to the
private placement that occurred during the second quarter of 1997. General and
administrative expense includes amortization of goodwill which increased from
$746,000 in 1996, to $853,000 in 1997 and $1,269,000 in 1998.
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 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.
In October 1996, the Company closed its facility in Camarillo,
California which served as a warehouse for hardware inventory and a remote
engineering office. As a result of such closure, the Company incurred a $410,000
loss which was recorded in 1996. The $410,000 loss resulted from subleasing the
facility and additional costs related to the relocation of employees and the
movement of inventory and equipment to the Company's headquarters in San Diego,
California.
INTEREST AND OTHER INCOME
Interest and other income was $31,000 $383,000, and $88,000 for
1998, 1997 and 1996, respectively. The decrease was due to lower cash balances
in 1998 compared to 1997. The increase in 1997 from 1996 was primarily due to
the subletting of a facility for rent equal to the Company's obligation under
non-cancelable terms for which the Company had previously accrued a loss for the
unfavorable lease. In addition, the increase in 1997 from 1996 was due to higher
short-term investment balances.
21
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $664,000, $447,000 and $114,000
for 1998, 1997 and 1996, respectively. The increase for 1998 compared to 1997
was due to a higher debt balance coupled with a higher rate of interest paid on
the Company's debt in 1998 as compared to 1997. The increase in 1997 from 1996
was also due to these same factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash and cash equivalents
totaled $530,000 as compared to $1,938,000 at December 31, 1997, and its current
ratio was .3 to 1. The Company has two revolving credit facilities which provide
for borrowings of up to $838,000. At December 31, 1998, $838,000 was outstanding
on the revolving loan agreements. In addition, the Company's U.K. subsidiary has
an overdraft credit facility of $415,000 (L250,000). The outstanding balance on
this facility is payable on demand of the lender. At December 31, 1998,
borrowings on this facility were $375,000. The Company has guaranteed the
borrowings on this facility. The Company and the bank agreed to extend the
facility from January 15, 1999 to April 30, 1999 for total borrowings not to
exceed $415,000 (L250,000). Interest shall be payable at 3% per annum over the
bank's base rate. See Note 4 of the Notes to the Consolidated Financial
Statements.
In 1998, cash provided by operating and financing activities totaled
$1,158,000 and $122,000, respectively, while cash used in investing activities
totaled $2,653,000. On September 21, 1998, the Company entered into an agreement
with SDRC to sell its RIPS product, including source code and to license certain
other software including portions of the Company's document management products,
Enabler and EB. The transaction provided cash of $2,375,000 to the Company.
Revenue related to this sale is being recognized over five years. The balance of
revenue not yet recognized is included in deferred revenue, although such
revenue will not result in further cash payment to the Company. Cash provided by
other deferred revenue totaled $1,216,000 in 1998. Deferred revenue varies from
quarter to quarter, and depends on the timing of payments received for the
Company's products and services as compared to the timing of revenue
recognition. The Company also received cash provided by financing activities
through net borrowings of $209,000 under the Company's revolving loan and bank
agreements. In 1997, cash provided by financing activities totaled $4,443,000 of
which $5,306,000 was generated by issuance of the Subordinated Debenture and the
Series D Preferred Stock in a private placement. This amount was partially
offset by repayments net of borrowings on the Company's revolving loan
agreements of $909,000. Cash used in operating and investing activities in 1997
totaled $2,355,000 and $2,372,000, respectively.
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 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. In addition because the overdraft credit facility of the
Company's U.K. subsidiary is payable upon demand, the Company could be required
to at any time to repay all outstanding borrowings under such facility. 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, in
1998, reduced its payroll cost, the largest cost element. In addition, the
Company has made further reductions of other expenditures. In the first quarter
of 1999, the Company has 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 in the near term,
22
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.
Accordingly, the Company is investigating raising additional cash through a
debt or equity offering or other means. Management believes that such
additional cash through the issuance of debt or other means will be necessary
to enable the Company to meet its short term needs for working capital. There
can be no assurance that additional debt or equity financing will be
available, or that, if available, such financing could be completed on
commercially favorable terms. Failure to obtain additional financing in the
near future, 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, 1998, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $42,000,000
and $9,429,000, respectively which expires over the years 1999 through 2018. In
addition, the Company generated but has not used research and investment tax
credits for federal income tax purposes of approximately $500,000, 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. However, 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.
Over the past five years, the Company has issued equity securities
in connection with the private placement in June 1997, the Trimco acquisition in
December 1995, the Optigraphics acquisition in September 1993 and through
traditional stock option grants to employees. Although there was no "ownership
change" in 1997, this activity increases the potential for an "ownership change"
for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired
$926,000 in deferred tax assets of which approximately $626,000 was provided as
a valuation allowance. In June 1997, the $300,000 tax asset was realized. In the
event that remaining tax benefits acquired in the Trimco 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.
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.
23
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
UNCERTAIN IMPACT OF RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the 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 connection with the
misapplications, conditions which collectively represented material weaknesses
in the Company's internal accounting controls were identified. These conditions
included a lack of (i) sufficient oversight by the Company in regard to revenue
recognition practices of the Company's U.K. subsidiary, (ii) adherence to
existing internal controls and (iii) an adequate internal control structure in
the Company's U.K. subsidiary.
To address the material weaknesses represented by these conditions,
the Company adopted a plan to strengthen the Company's internal accounting
controls. This plan included updating the Company's revenue recognition policies
regarding accounting and reporting for its customer contracts and contracts with
Value Added Resellers (VARs). The Company has implemented these policies.
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, 1998 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 sales in other parts of the world. In fiscal 1998, revenue from
the United States, Europe and other locations in the world were 63%, 33% and 4%,
respectively. This compares to 56%, 37% and 7%, respectively, in fiscal 1997 and
65%, 28% and 7%, respectively in fiscal 1996. 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.
24
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will 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 may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has commenced a program, to be substantially completed
by the Fall of 1999, 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. Implementation of software
products from third parties, however, will require the dedication of
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999 as a part of
the Company Year 2000 compliance program. The Company is in the process of
completing Year 2000 compliance reviews and upgrades to software or systems
which are deemed critical to the Company's business. The Company expects to
complete this by mid 1999. Nevertheless, particularly to the extent the Company
is relying on the products of other vendors to resolve Year 2000 issues, there
can be no assurances that the Company will not experience delays in implementing
such products. If key systems, or a significant number of systems were to fail
as a result of Year 2000 problems or the Company were to experience delays
implementing Year 2000 compliant software products, the Company could incur
substantial costs and disruption of its business, which would potentially have a
material adverse effect on the Company's business and results of operations.
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. However, some of the Company's customers are running product versions that
are not Year 2000 compliant. The Company has been encouraging these customers to
migrate to current product versions. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with Year 2000 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 a growing number 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.
25
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 sheet of Altris Software,
Inc. as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1998 and the consolidated results of its operations and
its consolidated cash flows for the year 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, 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, 1999. 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
March 23, 1999
26
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Altris Software, Inc.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position, results of operations and cash
flows of Altris Software, Inc. and its subsidiaries as of and for each of the
two years in the period ended December 31, 1997 listed in the index appearing
under Item 14 (a)(1) on page 50, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14 (a)(2) on page 50,
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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
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/ PRICE WATERHOUSE LLP
San Diego, California
May 12, 1998
27
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------------
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 530,000 $ 1,938,000
Short term investments -- 133,000
Receivables, net 1,128,000 3,045,000
Inventory, net 277,000 460,000
Other current assets 244,000 633,000
------------- ------------
Total current assets 2,179,000 6,209,000
Property and equipment, net 1,565,000 2,270,000
Computer software, net 4,685,000 3,042,000
Goodwill, net 2,645,000 3,914,000
Other assets 292,000 401,000
------------- ------------
Total assets $ 11,366,000 $ 15,836,000
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 2,779,000 $ 2,928,000
Accrued liabilities 1,934,000 2,758,000
Notes payable 745,000 730,000
Deferred revenue 3,230,000 1,770,000
------------- ------------
Total current liabilities 8,688,000 8,186,000
Long term notes payable 468,000 274,000
Deferred revenue, long term portion 2,131,000 --
Other long term liabilities 1,263,000 173,000
Subordinated debt, net of discount 2,591,000 2,473,000
------------- ------------
Total liabilities 15,141,000 11,106,000
------------- ------------
Commitments -- --
Mandatorily redeemable convertible preferred
stock, $1,000 par value, 3,000 shares
authorized; 3,000 shares Issued and
outstanding ($3,350,000 and $3,000,000
total liquidation preference, respectively) 3,003,000 2,682,000
Shareholders' (deficit) equity:
Common stock, no par value, 20,000,000 shares
authorized; 9,614,663 issued and
outstanding in 1998 and 1997 61,201,000 61,600,000
Common stock warrants 585,000 585,000
Accumulated other comprehensive income (10,000) 25,000
Accumulated deficit (68,554,000) (60,162,000)
------------- ------------
Total shareholders' (deficit) equity (6,778,000) 2,048,000
------------- ------------
Total liabilities and shareholders'
(deficit) equity $ 11,366,000 $ 15,836,000
------------- ------------
------------- ------------
The accompanying notes are an integral part of these consolidated
financial statements.
28
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
Revenues:
Licenses $ 4,189,000 $ 8,154,000 $ 9,554,000
Services and other 8,614,000 9,619,000 9,995,000
------------ ------------ ------------
Total revenues 12,803,000 17,773,000 19,549,000
------------ ------------ ------------
Cost of revenues:
Licenses 1,553,000 2,059,000 2,194,000
Services and other 5,474,000 7,324,000 7,346,000
------------ ------------ ------------
Total cost of revenues 7,027,000 9,383,000 9,540,000
------------ ------------ ------------
Gross profit 5,776,000 8,390,000 10,009,000
------------ ------------ ------------
Operating expenses:
Research and development 2,314,000 4,155,000 3,363,000
Marketing and sales 4,385,000 8,179,000 5,581,000
General and administrative 5,083,000 4,241,000 3,077,000
Settlement of lawsuits 1,128,000 -- --
Write off of capitalized software 625,000 -- --
Write down of assets to net realizable value -- 190,000 --
Loss on office closure -- -- 410,000
------------ ------------ ------------
Total operating expenses 13,535,000 16,765,000 12,431,000
------------ ------------ ------------
Loss from operations (7,759,000) (8,375,000) (2,422,000)
Interest and other income 31,000 383,000 88,000
Interest and other expense (664,000) (447,000) (114,000)
------------ ------------ ------------
Net loss $ (8,392,000) $ (8,439,000) $ (2,448,000)
------------ ------------ ------------
------------ ------------ ------------
Basic net loss per common share $ (.92) $ (.90) $ (.26)
------------ ------------ ------------
------------ ------------ ------------
Diluted net loss per common share $ (.92) $ (.90) $ (.26)
------------ ------------ ------------
------------ ------------ ------------
Shares used in computing basic and diluted
net loss per common share 9,615,000 9,585,000 9,250,000
The accompanying notes are an integral part of these consolidated
financial statements.
29
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Common
---------------------------- -------------------------- Stock
Shares Amount Shares Amount Warrants
------------ ------------- ---------- ------------ -------------
Balance at December 31, 1995 172,500 $ 3,306,000 8,475,452 $ 54,085,000 $ --
Exercise of stock options -- -- 316,875 1,263,000 --
Conversion of Series B Preferred Stock to
Common Stock (172,500) (3,306,000) 406,617 3,306,000 --
Issuance of Series C Preferred Stock 100,000 1,964,000 -- -- --
Conversion of Series C
Preferred Stock to Common Stock (100,000) (1,964,000) 236,000 1,964,000 --
Conversion of note to Common Stock -- -- 125,000 965,000 --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Total Comprehensive Income
------------ ------------- ---------- ------------ -------------
Balance at December 31, 1996 -- -- 9,559,944 61,583,000 --
Exercise of stock options -- -- 54,719 193,000 --
Issuance of common stock warrants -- -- -- -- 585,000
Preferred stock dividends -- -- -- (176,000) --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Total Comprehensive Income -- -- -- -- --
------------ ------------- ---------- ------------ -------------
Balance at December 31, 1997 -- -- 9,614,663 61,600,000 585,000
Foreign currency translation adjustment -- -- -- -- --
Preferred stock dividends -- -- -- (408,000) --
Stock option issued as compensation
to non-employee -- -- -- 9,000 --
Net loss -- -- -- -- --
Total Comprehensive Income
------------ ------------- ---------- ------------ -------------
Balance at December 31, 1998 -- $ -- 9,614,663 $ 61,201,000 $ 585,000
------------ ------------- ---------- ------------ -------------
------------ ------------- ---------- ------------ -------------
Accumulated
Other
Comprehensive Accumulated Comprehensive
Income Deficit Total Income
------------- ------------- ------------- -------------
Balance at December 31, 1995 $ -- $(49,275,000) $ 8,116,000 $ --
Exercise of stock options -- -- 1,263,000 --
Conversion of Series B Preferred Stock to
Common Stock -- -- -- --
Issuance of Series C Preferred Stock -- -- 1,964,000 --
Conversion of Series C
Preferred Stock to Common Stock -- -- -- --
Conversion of note to Common Stock -- -- 965,000 --
Foreign currency translation adjustment 3,000 -- 3,000 3,000
Net loss -- (2,448,000) (2,448,000) (2,448,000)
------------
Total Comprehensive Income $ (2,445,000)
------------
------------
------------- ------------- -------------
Balance at December 31, 1996 3,000 (51,723,000) 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 22,000
Net loss -- (8,439,000) (8,439,000) (8,439,000)
------------
Total Comprehensive Income -- -- -- (8,417,000)
------------
------------
------------- ------------- -------------
Balance at December 31, 1997 25,000 (60,162,000) 2,048,000
Foreign currency translation adjustment (35,000) -- (35,000) $ (35,000)
Preferred stock dividends -- -- (408,000) --
Stock option issued as compensation
to non-employee -- -- 9,000 --
Net loss -- (8,392,000) (8,392,000) (8,392,000)
------------
Total Comprehensive Income $ (8,427,000)
------------
------------
------------- ------------- -------------
Balance at December 31, 1998 $ (10,000) $(68,554,000) $ (6,778,000)
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
30
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
---------------------------------------------------
1998 1997 1996
------------ -------------- ---------------
Cash flows from operating activities:
Net loss $(8,392,000) $ (8,439,000) $ (2,448,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,659,000 2,389,000 2,000,000
Loss on disposal of assets 46,000 15,000 12,000
Settlement of lawsuits 1,128,000 -
Write off of capitalized software 625,000 - -
Write down of assets to net realizable value - 190,000 -
Changes in assets and liabilities, net of effect
of acquisitions:
Receivables, net 1,917,000 2,005,000 (843,000)
Inventory 183,000 12,000 (3,000)
Other assets 403,000 328,000 (569,000)
Accounts payable (149,000) 441,000 295,000
Accrued liabilities (815,000) 1,072,000 (1,525,000)
Deferred revenue 3,591,000 222,000 319,000
Other long term liabilities (38,000) (590,000) (182,000)
-------------- ------------- ---------------
Net cash provided by (used in) operating activities 1,158,000 (2,355,000) (2,944,000)
-------------- ------------- ---------------
Cash flows from investing activities:
Sale or maturity of short term investments 133,000 1,652,000 180,000
Purchases of short term investments held to maturity - (1,499,000) -
Purchases of property and equipment (137,000) (833,000) (1,142,000)
Purchases of software (294,000) (41,000) (306,000)
Computer software capitalized (2,355,000) (1,651,000) (1,078,000)
-------------- ------------- ---------------
Net cash used in investing activities (2,653,000) (2,372,000) (2,346,000)
-------------- ------------- ---------------
Cash flows from financing activities:
Repayments of revolving loan and bank agreements (333,000) (2,689,000) (212,000)
Net borrowings under revolving loan and bank
agreements 542,000 1,780,000 1,450,000
Net proceeds from issuance of preferred stock - 2,653,000 1,964,000
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) -
Proceeds from exercise of stock options - 193,000 1,263,000
Principal payment under cash advanced by a bank
related to former Optigraphics shareholder
notes payable - - (1,634,000)
-------------- ------------- ---------------
Net cash provided by financing activities 122,000 4,443,000 2,831,000
-------------- ------------- ---------------
Effect of exchange rate changes on cash (35,000) 22,000 3,000
-------------- ------------- ---------------
Net decrease in cash and cash equivalents (1,408,000) (262,000) (2,456,000)
Cash and cash equivalents at beginning of period 1,938,000 2,200,000 4,656,000
-------------- ------------- ---------------
Cash and cash equivalents at end of period $ 530,000 $ 1,938,000 $ 2,200,000
-------------- ------------- ---------------
-------------- ------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
31
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 $68,554,000, a working capital deficit of $6,509,000 and a deficit
in shareholders' equity of $6,778,000 as of December 31, 1998, which raise
substantial doubt about the Company's ability to continue as a going concern.
Due to significant losses and decreasing sales, the Company, in 1998, reduced
its payroll cost, the largest cost element. In addition, the Company has made
further reductions of other expenditures. In the first quarter of 1999, the
Company has 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 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. Accordingly, the Company is investigating
raising additional cash through a debt or equity offering or other means.
Management believes that such additional cash through the issuance of debt or
equity will be necessary to enable the Company to meet its short-term needs
for working capital. There can be no assurance that additional debt or equity
financing will be available, or that, if available, such financing could be
completed on commercially favorable terms. Failure to obtain additional
financing in the near future, can be expected to have a material adverse
affect 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.
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 transaction 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.
32
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 1998, the Company recognized revenue in accordance
with Statement of Position 97-2 "Software Revenue Recognition." In 1997 and
1996, the Company recognized revenue in accordance with Statement of Position
91-1 "Software Revenue Recognition". The implementation of 97-2 in 1998 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. 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, 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.
SHORT TERM INVESTMENTS
Management determines the appropriate classification of its
investments in marketable debt and equity securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. As of December 31,
1997, the Company had $133,000 in debt securities with a maturity date of one
year or less. The Company has classified its debt securities as held to maturity
and records such securities at amortized cost. In 1998, the Company redeemed its
debt securities at maturity with no realized gains or losses. Unrealized gains
and losses were not significant in 1997.
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
33
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
value. Cost is determined using the first-in, first-out (FIFO) method. As of
December 31, 1998 and 1997, the Company has provided a reserve of $651,000
and $511,000, respectively, to reduce the carrying amount to its estimated
net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated by 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 London subsidiary from seven to four years as a result of uncertainties
regarding future benefits to the Company provided by goodwill due to recurring
significant losses and negative cash flow of the subsidiary. Accumulated
amortization of goodwill was $3,014,000 and $1,745,000 at December 31, 1998 and
1997, respectively. The related amortization expense was $1,269,000, $853,000
and $746,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
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 $1,216,000 and $1,352,000 at
December 31, 1998 and 1997, respectively. The related amortization expense was
$381,000, $712,000 and $614,000 for the years ended December 31, 1998, 1997 and
1996, 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 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. At December 31, 1998,
total capitalized software costs associated with Altris EB totaled $4,672,000,
of which $2,355,000 was capitalized 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 4) 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 $104,000 and
$34,000 at December 31, 1998 and 1997, respectively. The related amortization
expense was $70,000 and $34,000 for the years ended December 31, 1998 and 1997,
respectively.
34
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
The Company adopted Statement of Financial Accounting Standard No.
128 ("FAS 128"), "Earnings Per Share", for fiscal 1997 and retroactively
restated all prior periods to conform with FAS 128 as required. 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 period. 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 period 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 and requires restatement of earlier periods presented,
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.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March of 1998, the AICPA issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. In December of 1998, the AICPA
also issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions", which applies to certain multiple-element
arrangements. The Company will implement both SOP's effective January 1, 1999,
which will not have a material effect on the Company's results of operations.
35
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REVERSE STOCK SPLIT
In October 1996, the shareholders of the Company approved an
amendment to the Company's Articles of Incorporation to effectuate a 1-for-2
reverse stock split of all outstanding shares of the Company's common stock. All
references in the Consolidated Financial Statements and in these notes have been
restated to reflect the split.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform with the 1998 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.
The following table provides supplemental cash flow information:
For the year ended December 31,
-------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Supplemental cash flow information:
Interest paid $ 445,000 $ 294,000 $ 75,000
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Schedule of noncash financing activities:
Conversion of Preferred Stock and note payable
to Common Stock $ - $ - $ 6,235,000
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 408,000 $ 29,000 $ -
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Stock option issued as compensation
to non-employee $ 9,000 $ - $ -
------------------ ------------------ ------------------
------------------ ------------------ ------------------
NOTE 3 - BALANCE SHEET INFORMATION:
December 31,
----------------------------------------------------
1998 1997
---- ----
RECEIVABLES, NET:
Billed receivables $ 1,193,000 $ 3,111,000
Unbilled receivables 129,000 219,000
Less allowance for doubtful accounts (194,000) (285,000)
------------------- ------------------
$ 1,128,000 $ 3,045,000
------------------- ------------------
------------------- ------------------
PROPERTY AND EQUIPMENT, NET:
Computer equipment $ 6,339,000 $ 6,269,000
Machinery and equipment 455,000 549,000
Furniture and fixtures 602,000 594,000
Leasehold improvements 570,000 548,000
------------------ ------------------
7,966,000 7,960,000
Less accumulated depreciation
36
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
and amortization (6,401,000) (5,690,000)
------------------- ------------------
$ 1,565,000 $ 2,270,000
------------------- ------------------
------------------- ------------------
37
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31,
----------------------------------------------------
1998 1997
---- ----
ACCRUED LIABILITIES:
Advance from customer $ - $ 433,000
Employee compensation and related expenses 228,000 568,000
Accrued vacation 261,000 293,000
Sales and VAT taxes payable 255,000 253,000
Accrued loss on office closure 29,000 42,000
Other 1,161,000 1,169,000
------------------ ------------------
$ 1,934,000 $ 2,758,000
------------------ ------------------
------------------ ------------------
OTHER LONG TERM LIABILITIES:
Accrued loss on office closure $ 77,000 $ 98,000
Settlement of lawsuits 1,128,000 -
Other 58,000 75,000
------------------ ------------------
$ 1,263,000 $ 173,000
------------------ ------------------
------------------ ------------------
NOTE 4 - NOTES PAYABLE AND SUBORDINATED DEBT:
Notes payable and subordinated debt consist of the following:
For the year ended December 31,
-------------------------------
1998 1997
---- ----
United Kingdom overdraft facility $ 375,000 $ 430,000
Revolving loans 838,000 574,000
Subordinated debt, less discount of $409,000 in 1998
and $527,000 in 1997 2,591,000 2,473,000
---------- ----------
$3,804,000 $3,477,000
---------- ----------
---------- ----------
In October 1998, the Company's United Kingdom subsidiary renewed an
overdraft facility with a bank. At December 31, 1998 interest is calculated at
3.0% per annum over the bank's base rate (9.5% at December 31, 1998). At
December 31, 1997, interest was calculated at 2% per annum over the bank's base
rate (9.25% at December 31, 1997). Currently the facility is for $415,000
(L250,000) and is payable on demand. At December 31, 1998 and 1997, $375,000 and
$430,000, respectively, was outstanding. Repayment of the borrowings under the
facility are collateralized by the property and assets of the Company's United
Kingdom subsidiary, including a L100,000 certificate on deposit. The Company has
also executed a guarantee in connection with the facility.
The Company has two revolving loan and security agreements, each
providing for borrowings of up to $1,000,000. The maximum credit available under
each facility declines by $200,000 each year beginning in March 1997 and
September 1996, respectively. Each loan is payable in monthly installments of
$16,667 plus interest equal to the 30-day Commercial Paper Rate plus 2.95%
(8.05% and 8.80% at December 31, 1998 and 1997, respectively). At December 31,
1998, $838,000 was outstanding under these two agreements with no additional
funds available. At December 31, 1997, $574,000 was outstanding. Total
borrowings under the revolving loan and security agreements are collateralized
by the Company's assets. The revolving loan and security agreements contain
certain restrictive covenants including the maintenance of a minimum ratio of
debt to tangible net worth. As of December 31, 1998, the Company was in
violation of such covenants. The Company obtained a waiver of such violations
through March 15, 2000.
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
38
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the debt has been allocated to common stock warrants, which were valued at
$585,000. In the event the debt is outstanding at June 2000, 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.
At December 31, 1995, the Company had an outstanding convertible
note in connection with the acquisition of Trimco. The principal balance of
$1,000,000 together with interest at 7% per annum was due on September 27, 1996.
The note was convertible into common stock at the rate of $8.00 per share, or an
aggregate of 125,000 shares. The note was secured by a second-priority lien on
the Company's assets, subject to the first-priority lien held by the lender in
connection with the Company's existing revolving loan agreement. In February
1996, the note was converted into 125,000 shares of the Company's common stock,
and no further obligations remain under the note.
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 long-term debt are as follows at December 31,
1998:
Year ending
December 31,
------------
1999 $ 745,000
2000 200,000
2001 200,000
2002 3,067,000
-----------
4,212,000
-----------
Less unamortized discount (408,000)
-----------
$ 3,804,000
-----------
-----------
NOTE 5 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
For the year ended December 31,
---------------------------------------------------------------
1998 1997 1996
---- ---- ----
Net Loss Used:
Net loss $ (8,392,000) $ (8,439,000) $ (2,448,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (408,000) (176,000) -
---------------- ----------------- -----------------
Net loss used in computing basic and diluted net
loss per share $ (8,800,000) $ (8,615,000) $ (2,448,000)
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 9,615,000 9,585,000 9,250,000
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Average employee stock options to acquire 739,000, 544,000 and
550,000, shares, were outstanding in fiscal 1998, 1997 and 1996,
respectively, but were not included in the computation of diluted
39
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
earnings per share because the effect was antidilutive. In addition, at
December 31, 1998, 1997 and 1996, 3,000, 3,000 and 100,000 shares,
respectively, of convertible preferred stock were also excluded from the
computation of diluted earnings per share because the effect was antidilutive.
NOTE 6 - 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 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 London 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 London subsidiary.
Settlement of lawsuits $1,128,000
Capitalized software costs expensed due to
change in architecture of Altris EB 625,000
Additional amortization of goodwill 450,000
----------
Increase in net loss $2,203,000
----------
----------
NOTE 7 - 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. The Series D Preferred Stock bears a dividend of 11.5% per annum
and is convertible into the Company's common stock at a price of $6.00 per share
subject to reset, as defined in the preferred stock agreement. Since March 1998
the Company has been in default of certain covenants under the Preferred Stock
Agreement, 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 D 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 D 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 D Preferred Stock, when added to all other shares of common stock issued
upon conversion of the Series D 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 D
Preferred Stock resulting in the issuance of shares of common stock up to the
Issuable Maximum, and the remaining portion of the Series D 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,
40
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, the
Company has agreed to grant warrants to purchase the following number of shares
of its common stock if the Series D 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, if the Series D 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 per share, if the Series D
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 D 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 D 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 4) 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 D 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 D 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). In 1998,
dividends of $87,000 were paid on the Series D Preferred Stock and as of
December 31, 1998 accumulated unpaid dividends amounted to $350,000.
In April 1996, the Company issued 100,000 shares of its Series C
Convertible Preferred Stock in an offshore private placement to a purchaser who
is not a resident of the United States. The Company received gross proceeds of
$2,000,000. In June 1996, 37,500 shares of Series C Preferred Stock were
converted into 72,726 shares of common stock. In July 1996, the remaining 62,500
shares of Series C Preferred Stock plus accrued dividends were converted into
163,274 shares of common stock.
In December 1995, the Company issued 172,500 shares of its Series B
Convertible Preferred Stock for gross proceeds of $3,450,000. In February 1996,
the 172,500 shares of Series B Preferred Stock were converted into 406,617
shares of common stock.
NOTE 8 - COMMON STOCK OPTIONS:
At December 31, 1998, 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,
------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Net loss used in computing net loss per share
As reported $ (8,800,000) $ (8,615,000) $ (2,448,000)
Pro forma $ (9,253,000) $ (10,060,000) $ (3,022,000)
Basic and diluted net loss per share
As reported $ (.92) $ (.90) $ (.26)
Pro forma $ (.96) $ (1.05) $ (.33)
41
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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:
1998 1997 1996
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 112% 78% 68%
Risk-free interest rate 5.1% 6.4% 6.2%
Expected lives (years) 5 5 4
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. There are 923,750 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 121,750 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,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 641,813 $ 5.43 445,212 $ 5.12 656,775 $ 2.24
Options granted 732,000 .41 532,751 5.80 449,500 6.96
Options exercised --- --- (54,719) 3.52 (316,875) 4.01
Options forfeited (537,063) 5.14 (281,431) 6.00 (344,188) 7.03
--------- --------- ---------
Outstanding at end of year 836,750 1.23 641,813 5.43 445,212 5.12
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year 263,910 276,887 166,950
Weighted average fair value of
options granted during the year $.43 $ 4.02 $6.36
42
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes information about employee stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding at remaining average exercisable at average
Exercise prices December 31, 1998 contractual life exercise price December 31, 1998 exercise price
- --------------- ----------------- ---------------- -------------- ----------------- ----------------
$.25 to $.35 402,000 9.72 years $.26 93,000 $.25
$.46 to $.63 278,000 9.55 years $.60 59,000 $.63
$2.76 to $3.38 43,375 0.75 years $3.18 43,375 $3.18
$4.13 to $5.94 101,375 4.19 years $5.38 62,535 $5.49
$6.38 to $7.88 12,000 8.06 years $6.51 6,000 $6.51
------- -------
$.25 to $7.88 836,750 8.51 years $1.23 263,910 $2.20
------- -------
------- -------
NOTE 9 - INCOME TAXES:
Deferred tax assets and liabilities are comprised of the following
at December 31:
1998 1997
--------------------- ----------------------
Deferred tax liability:
Purchased technology $ - $ (124,000)
--------------------- ----------------------
Deferred tax assets:
Net operating loss carryforwards 16,655,000 15,826,000
Research and development costs 959,000 1,276,000
Depreciation and amortization 197,000 18,000
Inventory 561,000 497,000
Deferred revenue 1,161,000 202,000
Accruals 168,000 149,000
Other 603,000 679,000
--------------------- ---------------------
Total deferred tax assets 20,304,000 18,647,000
--------------------- ---------------------
Net deferred tax assets 20,304,000 18,523,000
Valuation allowance (20,304,000) (18,523,000)
--------------------- ---------------------
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 Trimco, 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 Trimco 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 1998, 1997 or 1996 as the
Company has net operating loss carryforwards of $42,000,000 and $9,429,000 for
federal and state tax purposes, respectively, which expire over the years 1999
through 2018. 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
43
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
year. The Company has investment and research activity credit carryforwards
aggregating $500,000, which will substantially expire in the years 2000
through 2005.
NOTE 10 - 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. One customer accounted for 12% of the Company's total revenues in
1996.
Revenues for 1998, 1997 and 1996 by customer location are as
follows:
1998 1997 1996
----------- ----------- -----------
United States $ 7,977,000 $ 9,922,000 $12,778,000
Europe, primarily United Kingdom 4,337,000 6,599,000 5,450,000
Other International 489,000 1,252,000 1,321,000
----------- ----------- -----------
$12,803,000 $17,773,000 $19,549,000
----------- ----------- -----------
----------- ----------- -----------
Information by geographic location for the year ended December 31,
1998, 1997 and 1996 follows:
1998
---------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------ ------ ---------------------- -------------
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
---------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------ ------ ---------------------- -------------
Net sales $ 10,861,000 $ 6,912,000 -- $ 17,773,000
Operating income (loss) (1,726,000) (2,494,000) $ (4,155,000) (8,375,000)
Identifiable assets 7,784,000 8,052,000 -- 15,836,000
1996
---------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------ ------ ---------------------- -------------
Net sales $ 12,295,000 $ 7,254,000 -- $ 19,549,000
Operating income (loss) 1,512,000 (571,000) $ (3,363,000) (2,422,000)
Identifiable assets 10,113,000 8,147,000 -- 18,260,000
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.
44
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 11 - 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 that includes rent escalations not to exceed 4% in any year.
The Company subleased this other facility in 1996 and recognized a loss for the
difference in the lease and sublease rate along with other costs associated with
the office closure. 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 assumed leases for certain facilities leased by Trimco
for which no future benefit is anticipated. The accrual for unfavorable leases
assumed relates to a liability for the minimum lease payments less estimated
sublease rental income on these leases. In December 1997, the Company subleased
one of the facilities under a noncancellable agreement which ends in August 2006
for an amount equal to the Company's future obligation under the lease,
resulting in a $266,000 increase in other income.
The Company's United Kingdom subsidiary leases a facility for a term
through March 2001 with an option to extend the lease for an additional five
years. The Company also leases a facility in Florida under a lease which expires
in 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, 1998 under operating lease
agreements, net of noncancellable sublease payments of approximately $530,000,
are as follows:
Year ending
December 31
-----------
1999 $ 420,000
2000 450,000
2001 310,000
2002 298,000
2003 298,000
Thereafter 671,000
--------------
Total minimum lease payments $2,447,000
--------------
--------------
Rent expense under operating leases was $441,000, $717,000 and
$779,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 12 - LITIGATION:
On March 3, 1999, ("the settlement date"), the Company entered into
a Memorandum of Understanding providing for the settlement of certain securities
class action lawsuits pending against the Company. The Memorandum of
Understanding provides that in exchange for the dismissal and release of all
claims in these cases, (a) the Company's insurance carrier will pay $2,500,000
to the class of plaintiffs, (b) the Company will issue to the plaintiffs
2,304,271 shares of its common stock, 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 D
convertible Preferred Stock, and (c) the Company will cooperate with plaintiffs'
counsel by providing certain documents and information regarding the claims
asserted in the class actions. The settlement is subject to certain conditions,
including the execution of a stipulation of settlement, notice to the class and
approval by the court. The Company recorded expense of $1,128,000 in connection
with this
45
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
settlement in 1998 based on the average closing market price the week
preceding the settlement date 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 the 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 agreed to
execute 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 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(a) PREVIOUS INDEPENDENT ACCOUNTANTS
On February 17, 1999, Altris Software, Inc. dismissed
PricewaterhouseCoopers LLP ("PWC") as the principal independent accountants
engaged to audit the Company's financial statements. The Audit Committee of the
Company's Board of Directors approved the decision to change independent
accountants. In connection with its audits for the two most recent fiscal years
and through February 17, 1999, there have been no disagreements with PWC on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to PWC's
satisfaction would have caused PWC to make reference thereto in PWC's report on
the financial statements for such periods.
As previously disclosed, as a result of the Company's restatement of
its financial statements for the year ended December 31, 1996, on March 10,
1998, PWC notified the Company that it was withdrawing its report dated February
25, 1997 on the Company's financial statements for the year ended December 31,
1996. Upon restatement of those financial statements (in order to adjust the
timing and amount of revenues recognized, as previously disclosed), on May 12,
1998 PWC issued a new report on the Company's financial statements for the year
ended December 31, 1996. PWC noted in this report and in its report, dated May
12, 1998, on the Company's financial statements for the year ended December 31,
1997 that the Company's recurring losses and accumulated deficit raise
substantial doubt about its ability to continue as a going concern. PWC's
reports on the financial statements for December 31, 1997 and 1996 did not
contain an adverse opinion or a disclaimer of opinion and were not otherwise
qualified or modified as to audit scope or accounting principles.
During the two most recent fiscal years and through February 17,
1999, there has been a reportable event. In connection with PWC's audit of the
Company's restated financial statements for the year ended December 31, 1996 and
its financial statements for the year ended December 31, 1997, PWC reported to
the Audit Committee of the Board of Directors, at meetings held in the first
half of 1998, the following material weaknesses in the Company's internal
controls: (i) lack of sufficient U.S. oversight of the revenue recognition
practices of the Company's U.K. subsidiary; (ii) lack of adherence to existing
internal controls regarding assessment of credit worthiness and review of
contracts for propriety of revenue recognition; and (iii) lack of an adequate
internal control structure at the Company's U.K. subsidiary regarding a system
to track performance of services by contract, proof of shipment and sufficient
evidence of an agreement. In response to the restatement and the recommendations
of PWC, the Company has implemented changes to its internal control procedures
and oversight responsibilities.
(b) NEW INDEPENDENT ACCOUNTANTS
On February 17, 1999, the Company engaged Grant Thornton LLP,
independent public accountants, to audit the Company's financial statements for
the year ended December 31, 1998.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion sets forth certain information
concerning the Company's current directors and executive officers:
Name Age Position
- ----------------------- --- ------------------------------------
Roger H. Erickson 42 Chief Executive Officer and Director
D. Ross Hamilton 61 Director
Michael J. McGovern 69 Director
Larry D. Unruh 47 Director
Martin P. Atkinson 52 Director
David Chu 43 Vice President, Engineering
Steven D. Clark 47 Vice President, Sales
John W. Low 42 Chief Financial Officer and Secretary
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 currently serves as a director of
Luther Medical Products, Inc., a medical device manufacturer. Mr. Hamilton
received a B.S. degree in Economics from Auburn University in 1961.
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 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. 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,
and also serves as a director of LK Business Services Inc., a specialty
automobile lubricant manufacturer. Mr. Unruh received a B.S. degree in
Accounting from the University of Denver in 1973.
47
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. Chu was appointed Vice President, Engineering in April 1998.
Since joining the Company in February 1997, Mr. Chu served as Director U.S.
Software Engineering until April 1998. From 1995 to 1997, Mr. Chu was an
independent consultant for Performance Solutions Group, a technical consulting
organization. From 1984 to 1995, Mr. Chu was with Computer Associates
International most recently as Assistant Vice President of Research and
Development. Mr. Chu holds triple certifications as a Microsoft Certified
Systems Engineer, Solutions Developer and Trainer.
Mr. Clark was appointed Vice President, Sales in October 1997.
Previously, Mr. Clark had served as Vice President North American Sales since
January 1997. From 1994 through the end of 1996, Mr. Clark was Director of U.S.
Sales. From 1992 to 1994, Mr. Clark served as the Vice President of West Coast
Operations at PRC, a systems integration firm. From 1987 to 1992, Mr. Clark was
Director of Marketing for Optigraphics Corporation. From 1983 to 1987, he was
Vice President of Sales and Marketing at Energy Images in Boulder, Colorado.
From 1975 to 1983, Mr. Clark held several positions with Dun & Bradstreet
Petroleum Information. Mr. Clark earned a B.A. degree in Geography from the
University of Colorado in 1974.
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.
All directors are elected annually and serve until the next annual
meeting of shareholders and until their successors have been elected and
qualified.
All executive officers hold office at the discretion of the Board of
Directors.
Information relating to Directors is set forth in Registrant's
definitive proxy statement which is to be filed pursuant to Regulation 14A
within 120 days after the en of the Registrant's fiscal year ended December 31,
1998, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A within 120 days after the end of the Company's fiscal year ended December
31, 1998, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT
Information relating to Security Ownership of Certain Beneficial
Owners and Management is set forth in the Company's definitive proxy statement
which is to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1998, and such information is
incorporated herein by reference.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related
Transactions is set forth in the Company's definitive proxy statement which is
to be filed pursuant to regulation 14A within 120 days after the end of the
Company's fiscal year ended December 31, 1998, and such information is
incorporated herein by reference.
49
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, 1998 and 1997
Consolidated Statement of Operations for the years ended December
31, 1998, 1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended December
31, 1998, 1997 and 1996
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
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
50
10.9* Agreement and Plan of Merger and Reorganization dated as of July 7, 1993 by and among the Company,
AO Acquisition Corporation and Optigraphics Corporation
10.10* Amendment No. 1 to Agreement and Plan of Merger and Reorganization dated as of September 15, 1993 by
and among the Company, AO Acquisition Corporation and Optigraphics Corporation
10.11* WCMA and Term Loan Agreement dated July 6, 1994 between Optigraphics Corporation and Merrill Lynch
Business Financial Services, Inc.
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* Continuing Guarantee dated August 30, 1996 between Alpharel, Inc. and Lloyds Bank Plc
10.15* Overdraft Facility and Other Facilities dated August 26, 1997 between Altris Software, Inc. and Lloyds
Bank Plc
10.16* Certificate of Determination of Series D Convertible Preferred Stock of the Company
10.17* 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
10.18* 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
10.19* Debenture Purchase Agreement, dated as of June 27, 1997, by and between Altris Software, Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.20* Registration Rights Agreement, dated as of June 27, 1997, by and between Altris Software Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.21 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
10.22 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
10.23 Altris Software, Inc. Securities Litigation Memorandum of Understanding, as of March 1999.
10.24 Security Agreement, dated as of January 22, 1999, by and between Altris Software Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
21 Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Requirements for the Format and Input of Financial Data Schedules
- -------------------
*Incorporated herein by this reference from previous filings with the Securities
and Exchange Commission.
51
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 April 13, 1999.
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 April 13, 1999
- ---------------------------- Officer (Principal Executive Officer)
Roger H. Erickson
/s/ John W. Low Chief Financial Officer and Secretary April 13, 1999
- --------------------------- (Principal Financial and Accounting Officer)
John W. Low
/s/ Martin Atkinson Director April 13, 1999
- ---------------------------
Martin Atkinson
/s/ D. Ross Hamilton Director April 13, 1999
- ---------------------------
D. Ross Hamilton
/s/ Michael J. McGovern Director April 13, 1999
- ------------------------
Michael J. McGovern
/s/ Larry H. Unruh Director April 13, 1999
- ---------------------------
Larry D. Unruh
52
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, 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
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 125,000 $ 140,000 $ (94,000) (a) $ 171,000
Excess inventory reserve $ 2,119,000 $ (1,567,000) (b) $ 552,000
Tax benefit reserve $ 17,600,000 $ (338,000) (d) $ 17,262,000
(a) Amount written off
(b) Inventory scrapped or sold at less than cost
(c) Valuation allowance against benefit recorded
(d) Adjustment relating to tax provision or benefit expired
53