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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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(Cover page continues on next page)
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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. [ X ]
The aggregate market value of the voting stock on March 18, 1997, held
by non-affiliates* of the Registrant, based upon the last price reported on
the Nasdaq National Market on such date was $45,980,408.
The number of shares outstanding of the Registrant's Common Stock at the
close of business on March 18, 1997, was 9,572,569.
*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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement, which is to be
filed pursuant to Regulation 14A within 120 days after the end of
Registrant's fiscal year ended December 31, 1996, are incorporated by
reference in Part III of this Form 10-K.
The Registrant hereby amends the following items and financial statements of
its Annual Report on Form 10-K for the year ended December 31, 1996 as set
forth below. Items not referenced below are not amended. Items referenced
herein are amended in their entirety as set forth below:
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AMENDMENT OF ANNUAL REPORT ON FORM 10-K FOR 1996 TO REFLECT RESTATEMENT OF
FINANCIAL STATEMENTS
As a result of the misapplications in its revenue recognition
policies, Altris Software, Inc. (the "Company") has restated its previously
presented interim financial information and annual financial statements for
1996 and the interim information for the first three quarters of 1997. See
Note 1 of Notes to Consolidated Financial Statements and Form 8-K filed on
March 13, 1998, on the restatement of the Company's financial statements and
withdrawal of the report of independent accountants by Price Waterhouse LLP.
Also see report of independent accountants in Item 8, "Financial Statements
and Supplementary Data."
General information in the originally filed Annual Report on Form 10-K
was presented as of the March 31, 1997, the filing date or earlier, as
indicated. Unless otherwise stated, such information has not been updated in
this amended filing. Financial statements and related information contained
in this amended Annual Report on Form 10-K reflect, where appropriate,
changes to conform to the restatement.
PART I
ITEM 1. BUSINESS
The Company develops, markets and supports a suite of object-oriented,
multi-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 rangedevelops, markets and supports a suite of
object-oriented, multi-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
nt-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 intends to increase 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.
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 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.
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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.
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 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.
THE INDUSTRY
In today's marketplace, organizations are increasingly looking for
solutions to help manage their business information. Many companies are
overwhelmed by the amount and variety of information generated by their
vendors, customers, employees and consultants. As a result, organizations
are seeking computer-based information management solutions that enable them
to improve productivity, reduce costs, react quickly to changes in their
marketplace, improve customer service or comply with regulatory and quality
certification requirements.
Relational database management systems ("RDBMS") from leading companies
such as Oracle, Informix, 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, they were not designed to manage so-called
"unstructured" data.
Unstructured data, which can be broadly described as data that can not
be contained in a structured environment (i.e., rows and columns), includes
information generated by most software for personal computers and
workstations, such as word processing documents, spreadsheets and
computer-aided design
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("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. According to industry sources, up to 80% 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. According to International Data Corporation
("IDC"), an independent consulting group which follows the EDMS industry, the
EDMS software market was estimated to be approximately $225 million in 1995
and is expected to experience a compound annual growth rate of over 40%,
reaching almost $800 million in North America alone by 1997. The Gartner
Group, an information technologies ("IT") consulting group, has predicted
that compound annual growth rates for installed seats in the document
management market will exceed 75% in each of the next five years.
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.
THE ALTRIS SOFTWARE SOLUTION
The Company's suite of object-oriented, multi-tier, client/server
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
operate on most common hardware, software, network and database platforms,
including Microsoft Windows, Windows 95, Windows NT, Macintosh and UNIX
operating systems and Oracle, Microsoft, Informix and Sybase database
platforms.
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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 Netscape and Microsoft
Internet Explorer. The Company's products can also create a portable subset
of the document management system, along with search and view tools, which
can be placed on a laptop hard disk or CD-ROM.
ABILITY TO BE TAILORED. In addition, the Company's embedded 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. Furthermore, the Company's EDMS solution for a standard
system of 50 to 100 users can be implemented in as little as 15 working days.
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, human resources, manufacturing and accounting software systems.
STRATEGY
The Company's objective is to be the leading worldwide supplier of
document management software. To achieve this objective, 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 items to fit their own needs; (ii)
designing additional application programming interfaces ("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. The Company also intends to
continue to enhance the performance of its current products, such as by
enabling 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
geographically dispersed systems. The Company also plans to introduce new
products and product
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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.
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 to expand
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 hiring additional sales and support
personnel, increasing training and support programs, developing additional
software tools to facilitate configuration and recruiting additional VARs and
systems integrators in key geographical and vertical markets. The Company is
also currently seeking to develop additional OEM relationships.
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 scaleable 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.
ESTABLISH BRAND NAME. The Company has recently changed its name to
"Altris Software, Inc." to reflect the combination of the Alpharel and Trimco
organizations and products. The Company has begun efforts to establish name
recognition for the "Altris Software" name through targeted marketing
programs, including direct mail, channel marketing, promotions, seminars,
trade shows and ongoing customer and third party communication programs. The
Company is also establishing the Altris name through its public relations
programs, white papers, technical notes and programs for industry consultants.
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 recent 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.
FINANCIAL SERVICES. A major bank in the United Kingdom is using the
Company's office document management system to provide on-line customer
services at all of its locations. Customers can retrieve current account
information and view canceled checks, statements and loan documents on-line.
The Company's document management solution is also being used at a major U.S.
bank to facilitate the high-speed processing of checks, coupons, letters,
invoices and envelopes for corporate and commercial customers. This
high-volume system processes hundreds of thousands of receivables a day,
which are posted and available for viewing electronically more quickly than
through traditional services.
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 to expand 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.
As of December 31, 1996, the Company's sales and marketing organization
consisted of 46 employees primarily based in Company sales offices located in
the U.S. and in London, England. Additionally, the Company's field sales
force regularly conducts presentations and demonstrations of the Company's
suite of products to management and users at the customer site as part of the
direct sales effort. Sales cycles for the Company's products generally last
from six to twelve months.
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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 19% (restated) and 14% of the Company's total revenue for the
years ended December 31, 1996 and 1995, respectively.
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 hiring additional sales and support personnel, 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. OEMs also are an
integral part of the Company's distribution strategy as they generally
generate greater sales volume and require considerably less post-sales
support than the Company's VARs and systems integrators. The Company
currently is actively seeking to develop additional OEM relationships.
Set forth below are several of the VARs, systems integrators and OEMs
with whom the Company has entered into cooperative sales arrangements:
<TABLE>
<S> <C> <C>
Adepso Deverrill Plc Structural Dynamic Research Corp.
Alpha Numeric Solutions Excitech Computers Systemhouse
AMS GE Capital Consulting Simdell Office Systems
CACI Information Systems Koren Projects Management SMI Software
CAD Capture MDIS Softology
Control Data Systems Metaphase Staffware
Computing Devices International Octagon Computing Services Systeica
Data General Oswego Technologies TELSOC
DSS Persetel Wang
Datel Plexxus
</TABLE>
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, 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
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feedback to the Company as to end-users' demands and requirements and
generate recurring revenue. The Company plans to continue to expand its
services and support programs as the depth and breadth of the products
offered by the Company increases.
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 object-oriented, client/server 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 and process 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 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, the Company's COLD
technology provides the ability to capture structured data and retain and
present it in report format, allowing searches against the reports.
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LIBRARY SERVICES: The EDMS Server provides comprehensive library
functions, including storage, management, distribution, routing,
check-in/check-out, version control and change management. Documents of all
formats are managed in a secure environment which can provide distribution to
authorized users at remote sites. The EDMS Server permits storage to a wide
variety of media, including CD-ROM, magnetic disk, optical disks and a
redundant array of inexpensive disks ("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. The EDMS Server also provides stereo
vaulting capability, enabling two editions of documents to be stored, one for
editing and one for viewing distribution.
GRAPHICAL WORKFLOW: The EDMS Server provides tools which allow a
company to customize the workflow process. These tools work by using
"drag-and-drop" functions with icons to define the workflow process. This
fully integrated technology enables both ad-hoc and structured workflow.
Sophisticated reporting and monitoring tools are also provided to enable
users to manage the entire document life cycle.
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 and color images (in industry and
international standard formats) to be displayed with only about 5-10% of the
network traffic of competing products. This performance is achieved across
all 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. The EDMS
Server can also create a portable subset of the document management system,
along with search and view tools, which can be placed on a laptop hard disk
or CD-ROM using CD-ROM Author. To address network traffic limitations, the
Company has developed its TIE-Technology which displays documents at
significantly faster rates than competing products. The Company has also
developed Secure File Access which permits a company to restrict access and
editing within an EDMS on a document-by-document basis, as compared to
competitive products employing a network file system that can only restrict
access at the client/server level.
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:
- TARGET. The Company's Target product is designed for office
environments and provides a graphical interface to the EDMS Server,
enabling users to search for, display and route documents. In
addition, Target enables users to add documents and access such
functions as graphical work-flow and full text search. Such
functions are optional add-ons.
- PRO EDM. Pro EDM is designed for users in technical and
engineering organizations that need the capability to manage very
large and complex documents in hardcopy or electronic format. Pro
EDM offers the ability to manage these large and complex format
documents, as well as all of the functionality of the Company's
Target product.
- 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 Netscape and Microsoft Internet Explorer, allowing
users to search and display documents through the Internet and
Intranet without the need for any client-side software. As an option,
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however, users can choose to install a local copy of the Company's
view software for higher display performance.
- 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 AND ACROBAT. The Company's CAD Connect distributes
documents from the CAD system as a raster edition, enables
redlining on the raster edition and further enables the
incorporation of the redlining into the original CAD file following
import. The redlines are registered against the original just as
they were against the raster image and can be used by the drafter
as a reference or for direct incorporation. Acrobat Connect
provides PDF capability within a document management system.
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 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 includes APIs for document viewing, scanning, markup,
raster editing and printing, plus 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, Windows 95,
Windows NT, Macintosh and UNIX operating systems, and its EDMS Server
supports a range of server hardware including a variety of UNIX platforms
such as Hewlett-Packard, IBM, Sun, Digital and Data General as well as
Microsoft Windows NT on both Intel and DEC Alpha platforms. The system
operates in conjunction with industry-standard RDBMS including Oracle,
Sybase, Informix, Ingres, Microsoft Sequel Server and Progress. The system
also embeds leading full-text search technologies from Fulcrum, Excalibur and
BRS, and connects to leading e-mail packages such as Microsoft Mail and
cc:Mail.
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 target 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
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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 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.
The Company has committed substantial resources to product development.
As of December 31, 1996, the Company had 79 employees engaged in product
development and application engineering, and in 1996, 1995 and 1994, the
Company's research and product development expenses were approximately
$3,363,000, $1,402,000 and $769,000, 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 included in cost of revenues were approximately
$2,607,000, $2,140,000 and $2,313,000 for 1996, 1995 and 1994, respectively.
In 1996, a substantial portion of the Company's development efforts have been
devoted to integrating the Company's United Kingdom and United States
engineering resources in an effort to accelerate the introduction of its
next-generation Altris EB product offering and other next generation document
management products. The Company anticipates that it will continue to commit
substantial resources to research and development in the future. See
"Business-Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Operating Expenses."
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 (and its Saros subsidiary),
Novasoft 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
11
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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, Informix and Sybase,
and other software developers such as Microsoft, may compete with the Company
in the future. Like the Company's current competitors, many of these
companies have longer operating histories, significantly greater resources
and name recognition and a larger installed base of customers than the
Company.
The Company believes that the principal competitive factors affecting
its market include system features such as scalability of the system, the
ability to integrate with existing structural databases and other
applications such as document workflow and PDM, the ability to provide image
management capability, the price of the system, the level and cost of
integration required, the impact of the system on network 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.
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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,
1996, the Company's contract backlog was $5,405,000 (restated), as compared
to $4,132,000 at December 31, 1995. The Company expects $3,650,000 of the
December 31, 1996 backlog to be completed in 1997. 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 customarily 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 cinematic revisory capability that allows users to modify and store drawing
changes in raster and vector format for subsequent review of the original
document and each sequential revision. There can be no assurance that the
Company's patents will be found valid if challenged or, if valid, will
provide meaningful protection against competition. While the Company
believes that the protection afforded by its patents will have value, the
rapidly changing technology in the industry makes the Company's success
largely dependent on the technical competence and creative skills of its
personnel.
The Company also relies on a combination of trade secret, copyright and
non-disclosure agreements to protect its proprietary rights in its software
and technology. There can be no assurance that such measures are or will be
adequate to protect the Company's proprietary technology. Furthermore, there
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
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.
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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.
EMPLOYEES
As of February 28, 1997, the Company had 193 full-time employees, of
whom 79 were engaged in product development and application engineering
activities, 49 in customer support and implementation, 46 in sales and
marketing and 19 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. 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.
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PART II
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, 1996 have been derived from the audited Consolidated
Financial Statements. The results of Trimco and Optigraphics are included
since December 27, 1995 and September 23, 1993, the date of the acquisitions,
respectively (see Note 4 of the Notes to the Consolidated Financial
Statements).
The data set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
Consolidated Statement of Operations Data 1996(1) 1995 1994 1993 1992
------- -------- ------- ------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $19,549 $ 12,731 $ 9,547 $ 8,354 $ 6,273
Cost of revenues 9,540 5,791 4,822 4,444 4,275
------- -------- ------- ------- -------
Gross profit 10,009 6,940 4,725 3,910 1,998
------- -------- ------- ------- -------
Operating expenses:
Research and development 3,363 1,402 769 1,108 435
Charge for purchased research and
development - 10,595 - 4,920 -
Marketing and sales 5,581 3,570 2,627 1,361 763
General and administrative 3,077 1,581 1,146 907 696
Write down of assets to net
realizable value - 1,664
Restructuring expense - - - 3,447 -
Loss on office closure 410 - - - -
------- -------- ------- ------- -------
12,431 18,812 4,542 11,743 1,894
------- -------- ------- ------- -------
(Loss) income from operations (2,422) (11,872) 183 (7,833) 104
Interest and other income 88 137 207 183 179
Interest and other expense (114) (95) (115) (54) (61)
------- -------- ------- ------- -------
(Loss) income before income taxes (2,448) (11,830) 275 (7,704) 222
Provision for income taxes - - - - -
------- -------- ------- ------- -------
Net (loss) income $(2,448) $(11,830) $ 275 $(7,704) $ 222
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Net (loss) income per share $ (0.26) $ (1.68) $ .04 $ (1.29) $ .04
Weighted average shares outstanding 9,250 7,026 6,992 5,986 5,924
At December 31,
--------------------------------------------------------------------
Consolidated Balance Sheet Data 1996(1) 1995 1994 1993 1992
------- -------- ------- ------- -------
(In thousands)
Working capital $2,064 $ 939 $2,799 $ 5,007 $ 5,997
Total assets 18,260 19,002 9,771 11,087 10,554
Capital lease obligations - - - - 81
Long-term obligations 1,966 1,420 - 1,770 -
Shareholders' equity 9,863 8,116 5,658 5,364 9,101
</TABLE>
(1) See Note 1 to the Consolidated Financial Statements for information
concerning the Company's restatement of its financial statements. All
financial data in the table above for the year ended December 31, 1996
reflect such restatement.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. The following discussion has been restated to
reflect the correction of the misapplications of the Company's revenue
recognition policies as of and for the year ended December 31, 1996 (see Note
1 to the Notes of the Consolidated Financial Statements).
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:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1996 1995 1994
----- ----- -----
(Restated)
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 48.8 45.5 50.5
----- ----- -----
Gross profit 51.2 54.5 49.5
----- ----- -----
Operating expenses:
Research and development 17.2 11.0 8.1
Charge for purchased research and
development - 83.2 -
Marketing and sales 28.5 28.0 27.5
General and administrative 15.8 12.4 12.0
Write down of assets to net realizable value - 13.1 -
Loss on office closure 2.1 - -
----- ----- -----
63.6 147.7 47.6
----- ----- -----
(Loss) income from operations (12.4) (93.2) 1.9
Interest and other income .5 1.0 2.2
Interest and other expense (.6) (.7) (1.2)
----- ----- -----
(Loss) income before income taxes (12.5) (92.9) 2.9
Provision for income taxes - - -
----- ----- -----
Net (loss) income (12.5)% (92.9)% 2.9%
----- ----- -----
----- ----- -----
</TABLE>
REVENUES
Revenues for 1996 were $19,549,000 as compared to $12,731,000 for 1995.
The increase of 54% in 1996 is the result of the expansion of business
opportunities and resources in both international and domestic markets as a
result of the acquisition of Trimco in December 1995. In addition, revenues
increased due to sales of new software product and version releases. The
increase in 1996 revenues was also due in part to revenues generated by new
system sales and sales of enhancements, expansions and maintenance to an
expanded customer base. The Company's increased system sales resulted
primarily from increased demand for document management systems in the
marketplace which management believes is due to the reduction in the cost of
client/servers and workstations which, combined with document management
software, has brought about a more cost effective solution to customers.
Revenue derived from each new system varies depending on the number of users,
features and complexity of the system.
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New systems revenues in 1996, 1995, and 1994 were $10,262,000 (52%),
$6,285,000 (49%) and $4,074,000 (43%), respectively, while revenues from
system enhancements, expansion and maintenance were $9,287,000 (48%),
$6,446,000 (51%) and $5,473,000 (57%), 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 "Business - Sales and Marketing."
In 1996, new system revenues increased $3,977,000 from 1995, while
revenues from system enhancements, expansion and maintenance increased
$2,841,000. The increase in new system revenue was primarily due to orders
received from large corporate enterprise systems. The increase in system
expansions, enhancements and maintenance was due to continued expansions and
enhancements by the Company's growing installed customer base as the result
of the acquisition of Trimco in 1995.
In 1995, new system revenues increased $2,211,000 from 1994, while
revenues from system enhancements, expansion and maintenance increased
$973,000 over the same period. The increase in new system revenue was
primarily due to a greater number of sales of large systems in 1995 as
compared to 1994. The increase in revenues from system expansions and
enhancements was due to the Company's growing installed customer base, offset
in part by reduced maintenance revenues.
A small number of customers has typically accounted for a large
percentage of the Company's annual revenues. In 1996, one customer accounted
for 12% of total revenues. One consequence of this has been that revenues
can fluctuate significantly on a quarterly basis. Management believes that
the acquisition of Trimco at the end of 1995 has assisted in reducing the
Company's dependence on a relatively small number of large customers by
providing a larger base of customers for expansion, enhancement and
maintenance services.
COST OF REVENUES
Gross profit as a percentage of revenues was 51%, 55% and 50% for 1996,
1995 and 1994, respectively. Software license revenues were $9,554,000,
$5,369,000 and $2,551,000 in 1996, 1995 and 1994, respectively, representing
49%, 42% and 27% of revenues in each of those years, respectively. Although
software sales increased from 1995 to 1996, the gross profit percentage
decreased due to cost increases which were proportionately greater than
increases in revenues. In addition, less profitable third party software
sales represented a greater portion of total software sales in 1996 compared
to 1995. The gross profit percentage was also negatively affected from 1995
to 1996 by lower margins on hardware sales. The improvement in gross profit
margin in 1995 compared to 1994 was due primarily to the significant increase
in software license revenues. The higher margin of the software sales was
offset partially by lower margin hardware sales which increased from
$1,354,000 in 1994 to $2,333,000 in 1995. Service revenues, which include
maintenance, training and consulting services, increased to $8,158,000 in
1996 from $5,029,000 in 1995 which had decreased from $5,641,000 in 1994.
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 and third party software or hardware.
OPERATING EXPENSES
Research and development expense was $3,363,000, $1,402,000 and $769,000
for 1996, 1995 and 1994, respectively. The increase from 1995 to 1996 was
primarily due to additional personnel from the acquisition of Trimco, which
more than doubled the development team devoted to research and development
activities associated with new product version releases and the new
generation product suite. Research and development expense increased
$633,000 in 1995 from 1994 primarily due to the expansion of the Company's
engineering staff in connection with the Company's efforts to continue to
enhance and expand its current product suite. 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
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technological feasibility and marketability of a product are established.
These costs are capitalized as incurred and then amortized when the product
is available for general release to customers. Technical expenses on
customer-funded projects are included in cost of revenues, while expenses on
internal projects are included in research and development expense. See
"Business - Product Development." Technical expenses on customer-funded
projects were $2,607,000 in 1996, $2,140,000 in 1995 and $2,313,000 in 1994.
In connection with the acquisition of Trimco, the Company allocated a
significant portion of the purchase price to purchased research and
development resulting in a charge of $10,595,000 in 1995. See Note 4 of the
Notes to the Consolidated Financial Statements. The charge relates to
research and development projects in process relating to Trimco's next
generation of document management products. At the date of acquisition, the
technological feasibility of acquired technology had not yet been established
and the technology had no future alternative uses. The Company has expended
a significant portion of its own engineering resources on the further
development of this technology for anticipated new product offerings.
Marketing and sales expense was $5,581,000, $3,570,000 and $2,627,000
for 1996, 1995 and 1994, respectively. The increase from 1995 to 1996 was
primarily due to additional personnel and other costs resulting from the
addition of Trimco's operations. In addition, the Company incurred
additional marketing and promotional costs as a result of its name change and
from increasing its presence at trade shows. The increase from 1994 to 1995
was primarily due to additional sales and support personnel hired along with
additional costs associated with the Company's revenue growth. During 1995,
the Company opened three new sales offices. In addition, the Company
significantly increased its presence at trade shows and increased the amount
of expenditures on advertising materials.
General and administrative expense was $3,077,000, $1,581,000 and
$1,146,000 for 1996, 1995 and 1994, respectively. The increase from 1995 to
1996 was due primarily to additional personnel and other costs resulting from
the addition of Trimco's operations. General and administrative expense
includes amortization of goodwill which increased from $66,000 in 1995 to
$746,000 in 1996. The increase in general and administrative expense from
1994 to 1995 was due primarily to costs associated with additional personnel.
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 Company's engineers who were
in the Camarillo office are now telecommuting from their homes and other
locations. 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.
In connection with the acquisition of Trimco in 1995, the Company
wrote-down certain intangible assets to their net realizable value, resulting
in a $1,664,000 charge to operations. The write-down was a result of the
acceleration of the Company's plans to introduce a next-generation suite of
products. Management believes that the Company will be able to complete the
development of these new products sooner using the resources of the combined
companies, thus reducing the likelihood of recovering existing capitalized
software costs associated with the Company's current generation of products.
In addition, the costs of certain software development tools which will not
be utilized in the development of next-generation products, and certain
software products to be replaced, were written off.
INTEREST AND OTHER INCOME
Interest and other income was $88,000, $137,000 and $207,000 for 1996,
1995 and 1994, respectively. The decrease in 1996, 1995 and 1994 was
primarily the result of lower short-term investment balances.
18
<PAGE>
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $114,000, $95,000 and $115,000 for
1996, 1995 and 1994, respectively. The increase in interest expense for 1996
compared to 1995 was due to the higher rate of interest paid on the Company's
debt. While the Company had a higher debt balance in 1995 versus 1996, the
rate of interest paid was more favorable in 1995 than 1996. The decrease in
1995 from 1994 was due to lower interest expense incurred on the Company's
debt.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's cash and cash equivalents totaled
$2,200,000 as compared to $4,656,000 at December 31, 1995, and its current
ratio was 1.3 to 1. The Company also had short-term investments totaling
$90,000 comprised of time deposits. The Company has two revolving credit
facilities which provide for borrowings of up to $1,771,000. At December 31,
1996, $1,403,000 was outstanding on the revolving loan agreements and
$368,000 was unused (see Note 6 of the Notes to the Consolidated Financial
Statements).
In 1996, cash provided by financing activities totaled $2,831,000 while
cash used in operating and investing activities totaled $2,944,000 and
$2,346,000, respectively. Cash provided by financing activities in 1996 was
primarily through the issuance of Series C convertible preferred stock
totaling $1,964,000. Cash used in investing activities was used primarily
for capital expenditures totaling $1,142,000.
In 1995, cash provided by operating and financing activities totaled
$1,191,000 and $8,340,000, respectively, while cash used in investing
activities totaled $5,911,000. Cash generated from financing activities in
1995 was primarily through the issuance of Series B convertible preferred
stock totaling $3,306,000 and the exercise of warrants totaling $4,230,000.
A substantial portion of the cash used in investing activities was used in
connection with the acquisition of Trimco and the payoff of the remaining
payable to former Optigraphics shareholders which totaled $5,785,000.
On December 27, 1995, the Company acquired Trimco. See Note 4 to the
Consolidated Financial Statements. The cash portion of the consideration to
Trimco shareholders totaled $5,550,000. As part of the transaction, the
Company also issued a convertible note due in September 1996, having a
principal balance of $1,000,000 with interest payable at 7% per annum. In
February 1996, the note was converted into 125,000 shares of the Company's
common stock. In addition, in connection with the transaction, the Company
assumed an accrued liability for $1,051,000 payable to Trimco employees in
January 1996.
The Company believes that current working capital and funds generated
from operations will be adequate to meet expected needs for working capital
and capital expenditures over at least the next twelve months; however, in
order to continue to expand the Company's market penetration with its
next-generation product suite and to increase name recognition with the
Company's new name, the Company intends to explore additional financing
options.
NET OPERATING LOSS TAX CARRYFORWARDS
As of December 31, 1996, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $34,100,000
and $7,600,000, respectively. In addition, the Company generated but has not
used research and investment tax credits for federal income tax purposes of
approximately $500,000. 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
19
<PAGE>
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 four years the Company has issued equity securities in
connection with 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 1996, this activity,
combined with the liquidity available to stockholders, increases the
potential for an "ownership change" for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired
deferred tax assets of approximately $926,000. The Company has recorded a
$626,000 valuation allowance, offsetting the deferred tax assets. Any future
recognition of acquired tax 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' NOL of $9,500,000 for federal income tax purposes. As a result
of the change in ownership of Optigraphics, $8,000,000 of the NOL is limited
whereby the Company may only utilize approximately $500,000 annually to
offset future taxable income of Optigraphics. The remaining portion of
Optigraphics' NOL does not have any annual limitation.
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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Altris Software, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 40, after the
restatement described in Note 1, present fairly, in all material respects,
the financial position of Altris Software, Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company has restated its financial statements for certain misapplications in
its revenue recognition policies as of and for the year ended December 31,
1996.
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note
2 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 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ PRICE WATERHOUSE LLP
San Diego, California
May 12, 1998
21
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----------- -----------
(Restated-Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,200,000 $ 4,656,000
Short term investments 90,000 270,000
Receivables, net 5,050,000 4,207,000
Inventory, net 472,000 469,000
Other current assets 683,000 803,000
----------- -----------
Total current assets 8,495,000 10,405,000
Property and equipment, net 2,156,000 1,645,000
Computer software, net 2,252,000 1,549,000
Goodwill, net 4,972,000 4,945,000
Other assets 385,000 458,000
----------- -----------
$18,260,000 $19,002,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,487,000 $ 2,192,000
Accrued liabilities 1,686,000 3,211,000
Notes payable 710,000 1,834,000
Convertible note payable - 1,000,000
Deferred revenue 1,548,000 1,229,000
----------- -----------
Total current liabilities 6,431,000 9,466,000
Long term notes payable 1,203,000 475,000
Other long term liabilities 763,000 945,000
----------- -----------
Total liabilities 8,397,000 10,886,000
----------- -----------
Commitments (Note 12)
Shareholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized;
750,761 designated;
172,500 shares issued and outstanding - 3,306,000
Common stock, no par value, 20,000,000
shares authorized;
9,559,944 and 8,475,452 issued and
outstanding, respectively 61,583,000 54,085,000
Foreign currency translation adjustment 3,000 -
Accumulated deficit (51,723,000) (49,275,000)
----------- -----------
Total shareholders' equity 9,863,000 8,116,000
----------- -----------
$18,260,000 $19,002,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------
1996 1995 1994
----------- ----------- ----------
(Restated-Note 1)
<S> <C> <C> <C>
Revenues $19,549,000 $12,731,000 $9,547,000
Cost of revenues 9,540,000 5,791,000 4,822,000
----------- ----------- ----------
Gross profit 10,009,000 6,940,000 4,725,000
----------- ----------- ----------
Operating expenses:
Research and development 3,363,000 1,402,000 769,000
Charge for purchased research and
development - 10,595,000 -
Marketing and sales 5,581,000 3,570,000 2,627,000
General and administrative 3,077,000 1,581,000 1,146,000
Write down of assets to net realizable value - 1,664,000 -
Loss on office closure 410,000 - -
----------- ----------- ----------
Total operating expenses 12,431,000 18,812,000 4,542,000
----------- ----------- ----------
Income (loss) from operations (2,422,000) (11,872,000) 183,000
Interest and other income 88,000 137,000 207,000
Interest and other expense (114,000) (95,000) (115,000)
----------- ----------- ----------
Income (loss) before income taxes (2,448,000) (11,830,000) 275,000
Provision for income taxes - - -
----------- ----------- ----------
Net income (loss) $(2,448,000) $(11,830,000) $275,000
----------- ----------- ----------
----------- ----------- ----------
Net income (loss) per share $(0.26) $(1.68) $.04
----------- ----------- ----------
----------- ----------- ----------
Weighted average shares
outstanding 9,250,000 7,026,000 6,992,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
23
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Currency
Preferred Stock Common Stock Translation Accumulated
Shares Amount Shares Amount Adjustment Deficit
-------- ---------- --------- ----------- ----------- ------------
(Restated-Note 1)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,827,799 $43,084,000 $(37,720,000)
Exercise of stock options 42,625 19,000
Net income 275,000
--------- ----------- ------------
Balance at December 31, 1994 6,870,424 43,103,000 (37,445,000)
Exercise of stock options 213,188 188,000
Exercise of underwriter unit warrants 75,000 382,000
Exercise of warrants 459,446 3,848,000
Issuance of Common Stock
in connection with acquisition 857,394 6,564,000
Issuance of Series B Preferred Stock 172,500 $3,306,000
Net loss (11,830,000)
-------- ---------- --------- ----------- ------------
Balance at December 31, 1995 172,500 3,306,000 8,475,452 54,085,000 (49,275,000)
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 $3,000
Net loss (restated-Note 1) (2,448,000)
-------- ---------- --------- ----------- ----------- ------------
Balance at December 31, 1996 - $ - 9,559,944 $61,583,000 $3,000 $(51,723,000)
-------- ---------- --------- ----------- ----------- ------------
-------- ---------- --------- ----------- ----------- ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------
1996 1995 1994
----------- ------------ -----------
(Restated-Note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,448,000) $(11,830,000) $ 275,000
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,000,000 797,000 621,000
Loss on disposal of assets 12,000 - -
Charge for purchased research and development - 10,595,000 -
Write down of assets to net realizable value - 1,664,000 -
Changes in assets and liabilities, net of effect of acquisitions:
Receivables, net (843,000) (422,000) (625,000)
Inventory, net (3,000) 303,000 (164,000)
Other assets (569,000) (161,000) (217,000)
Accounts payable 295,000 (73,000) 317,000
Accrued liabilities (1,525,000) 145,000 (932,000)
Billings in excess of costs - - (351,000)
Deferred revenue 319,000 28,000 (315,000)
Other long term liabilities (182,000) 145,000 -
----------- ------------ -----------
Net cash (used in) provided by operating activities (2,944,000) 1,191,000 (1,391,000)
----------- ------------ -----------
Cash flows from investing activities:
Short term investments maturing 180,000 1,534,000 635,000
Purchases of property and equipment (1,142,000) (504,000) (295,000)
Purchases of software (306,000) (135,000) (170,000)
Computer software capitalized (1,078,000) (1,021,000) (806,000)
Cash paid for acquisitions, net of cash acquired - (5,785,000) (150,000)
----------- ------------ -----------
Net cash used in investing activities (2,346,000) (5,911,000) (786,000)
----------- ------------ -----------
Cash flows from financing activities:
Principal payment of cash advanced by a bank
related to former Optigraphics shareholder
notes payable (1,634,000) - -
Principal payments under capital lease obligations - - (81,000)
Repayments of notes payable (212,000) (84,000) (62,000)
Net borrowings under revolving loan and bank
agreements 1,450,000 700,000 -
Retirement of note payable to former
Optigraphics shareholder - - (36,000)
Net proceeds from issuance of preferred stock 1,964,000 3,306,000 -
Proceeds from exercise of warrants - 4,230,000 -
Proceeds from exercise of stock options 1,263,000 188,000 19,000
----------- ------------ -----------
Net cash provided by (used in) financing activities 2,831,000 8,340,000 (160,000)
----------- ------------ -----------
Effect of exchange rate changes on cash 3,000 - -
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents (2,456,000) 3,620,000 (2,337,000)
Cash and cash equivalents at beginning of period 4,656,000 1,036,000 3,373,000
----------- ------------ -----------
Cash and cash equivalents at end of period $ 2,200,000 $ 4,656,000 $ 1,036,000
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the misapplications in its revenue recognition
policies, Altris Software, Inc. (the "Company") has 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 reflects changes in the timing and amount of revenue recognition
for those contracts where subsequently discovered facts indicate that revenue
had initially been recognized before: (a) there was persuasive evidence of
an agreement between the Company and the customer; (b) the amount of the fee
had become fixed; (c) there was sufficient evidence of the delivery of the
product or services; (d) customer cancellation rights had expired; or (e) a
reasonable estimate could be made of returns from those customers (primarily
value added resellers) having exchange rights.
The Consolidated Statement of Operations has been restated as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1996
------------------
Previously As
Reported Adjustment Restated
<S> <C> <C> <C>
Revenues $24,511,000 $(4,962,000) $19,549,000
Gross Profit 14,807,000 (4,798,000) 10,009,000
Net income (loss) 2,350,000 (4,798,000) (2,448,000)
Net income (loss) per share .25 (0.51) (0.26)
</TABLE>
The Consolidated Balance Sheet has been restated as follows:
<TABLE>
<CAPTION>
As of December 31, 1996
-----------------------
Previously As
Reported Adjustment Restated
<S> <C> <C> <C>
Total current assets $13,126,000 $(4,631,000) $8,495,000
Total current liabilities 6,155,000 276,000 6,431,000
Total shareholder's equity 14,770,000 (4,907,000) 9,863,000
</TABLE>
NOTE 2 - LIQUIDITY AND CAPITAL RESOURCES:
The Company has suffered recurring losses and has an accumulated deficit
of $51,723,000 as of December 31, 1996. Management has reduced the Company's
workforce and plans to continue to further reduce expenditures. Management
believes that such reductions, and funds expected to be generated from
operations, will be sufficient to meet its expected short-term needs for
working capital. However, the Company's ability to continue operations
without additional capital is dependent upon, among other factors, the
Company's ability to sustain revenues from its existing customer base and to
sell new systems, the continued forbearance of the Company's lenders and the
outcome of the litigation filed against the Company which allege violations
of the federal securities laws (see Note 13). There can be no assurance that
sufficient cash flows will be generated by the Company to avoid the further
depletion of its working capital or that the outcome of the litigation will
not have a material adverse impact on the Company's operations. Accordingly,
management intends to obtain additional debt or equity financing. There can
be no assurance that additional debt or equity financing will be available,
if and when needed, or that, if available, such financing could be completed
on commercially favorable terms.
26
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - 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 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
pounds 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 translation are excluded from net income and
accumulated in a separate component of shareholders' equity. Gains and
losses resulting from foreign currency transactions, which are not
significant, are included in the Consolidated Statement 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, valuation of stock
issued in acquisitions, allowance for doubtful accounts and reserves for
excess or obsolete inventory.
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 hardware. The
Company recognizes revenue in accordance with Statement of Position 91-1
"Software Revenue Recognition." Software license and third party hardware
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 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 costs incurred to date compared
with total estimated costs 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 current
liabilities.
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" as
amended by Statement of Position 98-4 ("SOP 98-4"). The Company will be
required to adopt the provisions of SOP 97-2 for transactions entered
into on or after January 1, 1998. SOP 98-4 is effective as of March 31, 1998.
The adoption may, in certain circumstances, result is the deferral of
software license revenue that would have been recognized upon delivery of the
related software under preceding accounting standards. In response to SOP
97-2, the Company will likely change its business practices and, consequently,
at this time the Company cannot quantify the effect that SOP 97-2 will have
to its operating results, financial position or cash flows.
27
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INVESTMENTS
It is management's belief that the carrying amounts shown for the
Company's financial instruments are reasonable estimates of their related
fair values.
SHORT TERM INVESTMENTS
Short term investments consist of time deposits which are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity.
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 and is stated at
the lower of cost or market value. Cost is determined using the first-in,
first-out (FIFO) method. As of December 31, 1996 and 1995, the Company's
reserve against excess quantities totaled $552,000 and $2,119,000,
respectively.
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
seven years. Accumulated amortization of goodwill was $892,000 and $146,000
at December 31, 1996 and 1995, respectively. The related amortization
expense was $746,000, $66,000 and $66,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
SOFTWARE DEVELOPMENT COSTS
Software development and purchased software costs 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 $776,000 and
$470,000 at December 31, 1996 and 1995, respectively. The related
amortization expense was $614,000, $325,000 and $191,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company evaluates the
carrying value of unamortized capitalized software costs at each balance
sheet date to determine whether any net realizable value adjustments are
required (see Note 4).
28
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets, on
an exception basis, 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. No such impairment
losses have been recorded by the Company.
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 (see Note 10).
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed on the basis of weighted average
shares and common stock equivalent shares outstanding for each period
presented, if dilutive. In March 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"), which changes the method of calculating earnings per
share. SFAS 128 is effective for financial statements issued after December
15, 1997. Management believes that the adoption of SFAS 128 will not have a
material impact on the Company's earnings per share.
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 common stock of the Company. All
references in the Consolidated Financial Statements and in these notes have
been restated to reflect the split.
29
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
In 1995, cash and non-cash investing and financing activities relating
to the acquisition of Trimco Group plc (see Note 4) were as follows:
<TABLE>
<S> <C>
Purchased research and development $10,595,000
Fair market value of assets acquired, excluding cash 8,195,000
Liabilities assumed (5,046,000)
Common stock issued (6,564,000)
Note payable issued (1,000,000)
Accrued acquisition costs (587,000)
-----------
Cash paid for acquisition of Trimco $ 5,593,000
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid $ 75,000 $ 86,000 $115,000
---------- -------- --------
---------- -------- --------
Schedule of noncash financing activity:
Conversion of Preferred Stock and note
payable to Common Stock $6,235,000 $ - $ -
---------- -------- --------
---------- -------- --------
Indemnification obligations applied
against notes payable to former
Optigraphics shareholders $ - $100,000 $ -
---------- -------- --------
---------- -------- --------
</TABLE>
NOTE 4 - ACQUISITIONS AND RESTRUCTURING:
TRIMCO GROUP PLC:
On December 27, 1995, the Company entered into a Sale and Purchase
Agreement to acquire all of the outstanding stock of Trimco Group plc
("Trimco") for total consideration of $14,165,000 before acquisition costs of
$630,000. The purchase price was comprised of $5,550,000 in cash, 857,394
shares of the Company's common stock with a valuation of $6,564,000 and a
convertible note payable having a total principal amount of $1,000,000 due
September 27, 1996. The purchase price also included obligations assumed
which were paid to Trimco employees in connection with the acquisition,
consisting of cash of $1,051,000. During the third quarter of 1996, the
Company completed the allocation of the purchase price initially made at the
time of the Trimco acquisition based on preliminary information, which
resulted in a decrease in goodwill and an increase in purchased technology of
$127,000. During 1996, the Company incurred additional costs associated with
the Trimco acquisition, which resulted in an increase in goodwill of
$900,000. The increase was due primarily to the settlement of a contract
dispute associated with certain claims on Trimco projects performed in 1995,
which resulted in a payment of $432,000 in September 1996. The additional
goodwill is being amortized over the remaining useful life of the goodwill.
The acquisition was accounted for using the purchase method. A portion
of the purchase price relates to research and development projects that
Trimco had undertaken, resulting in a charge of $10,595,000 to the Company's
operations. The technological feasibility of acquired technology had not yet
been established at the date of acquisition and the technology had no future
alternative uses. The Company anticipates expending a significant portion of
its own development resources on the completion of this technology for
anticipated new product offerings. The excess of the purchase price over the
fair value of the tangible and identifiable intangible assets acquired (after
allocation of the purchased research and
30
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
development) totaled $5,413,000 which was recorded as goodwill. The goodwill
is being amortized over its estimated useful life of seven years. Trimco's
operating results have been included in the consolidated financial statements
from the date of acquisition.
The Company also reduced its forecast for future sales of certain
software development and purchased software costs. These costs were deemed
not to be recoverable due to the Company's plan to accelerate the
introduction of its next generation of software products as a result of the
greater development resources now available. In addition, the costs of
certain software development tools which will not be utilized in the
development of the next generation of software products and certain software
products to be replaced were also written off to net realizable value.
Included in the Company's operating results is a $1,664,000 charge related to
these write offs.
The following unaudited pro forma summary presents the consolidated
results of operations as if the Trimco acquisition had occurred on January 1,
1994, after giving effect to certain adjustments, including amortization of
goodwill and interest expense on the convertible note payable. The pro forma
results have been prepared for comparative purposes only and do not purport
to indicate the results of operations which may have actually occurred had
the combination been in effect during the periods presented, or which may
occur in the future. The pro forma results are as follows:
<TABLE>
<CAPTION>
( Unaudited )
(000's except per share data)
For the year ended December 31,
--------------------------------
1995 1994
------- --------
<S> <C> <C>
Total revenue $20,752 $ 16,305
Net loss $(1,117) $(11,312)
Net loss per share $ (.14) $ (1.44)
Shares used in per share calculation 7,874 7,849
</TABLE>
31
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
------------ ------------
(Restated-Note 1)
<S> <C> <C>
Receivables, net:
-----------------
Billed receivables $ 4,297,000 $ 4,287,000
Unbilled receivables 924,000 45,000
Less allowance for doubtful accounts (171,000) (125,000)
------------ ------------
$ 5,050,000 $ 4,207,000
------------ ------------
------------ ------------
Other current assets:
---------------------
Prepaid maintenance contracts $ 84,000 $ 92,000
Prepaid expenses and other 599,000 711,000
------------ ------------
$ 683,000 $ 803,000
------------ ------------
------------ ------------
Property and equipment, net:
----------------------------
Machinery and equipment $ 566,000 $ 574,000
Computer equipment 5,640,000 4,885,000
Furniture and fixtures 587,000 419,000
Leasehold improvements 466,000 177,000
------------ ------------
7,259,000 6,055,000
Less accumulated depreciation
and amortization (5,103,000) (4,410,000)
------------ ------------
$ 2,156,000 $ 1,645,000
------------ ------------
------------ ------------
Accrued liabilities:
--------------------
Employee compensation and related expenses $ 432,000 $ 1,333,000
Accrued vacation 217,000 233,000
Accrued acquisition costs - 447,000
Accrued loss on office closure 198,000 -
Other 839,000 1,198,000
------------ ------------
$ 1,686,000 $ 3,211,000
------------ ------------
------------ ------------
Other long term liabilities:
----------------------------
Accrual for unfavorable leases assumed $ 482,000 $ 622,000
Accrued loss on office closure 142,000 -
Other 139,000 323,000
------------ ------------
$ 763,000 $ 945,000
------------ ------------
------------ ------------
</TABLE>
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.
32
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE:
In October 1996 and September 1995, the Company entered into revolving
loan and security agreements, each providing for borrowings of up to
$1,000,000. The maximum credit available under one facility declines by
$200,000 in September of each year beginning in 1996. The loan balance is
payable in monthly installments of $16,667. At December 31, 1996, $771,000
was outstanding on this agreement. The loan balance for the other facility
is payable in monthly installments. At December 31, 1996, $632,000 was
outstanding and $368,000 was unused on this agreement. Total borrowings
under the revolving loan and security agreements are collateralized by the
Company's assets and interest is equal to the 30-day Commercial Paper Rate
plus 2.95% (8.91% at December 31, 1996). The revolving loan and security
agreements contain certain restrictive covenants including maintaining a
certain ratio of debt to tangible net worth. As a result of the restatement
(see Note 1), the Company was no longer in compliance with such covenants at
December 31, 1996. The lender under these agreements has agreed to waive such
events of default for the remainder of 1997, and such lender has also waived
compliance with certain financial covenants until May 1999.
In September 1996, the Company's United Kingdom subsidiary renewed a
$510,000 overdraft facility with a bank with interest payable quarterly at
2.5% per annum over the bank's base rate (8.5% at December 31, 1996). The
facility expires in August 1997 with any remaining balance due and payable.
At December 31, 1996, $510,000 was outstanding on the facility. Repayment of
borrowings under the facility are secured by the Company's property and
assets, and the Company has executed a guarantee of up to $500,000 in
connection with the facility.
At December 31, 1995, the Company had an outstanding payable for cash
advanced by a bank which acted as paying agent for the notes due to former
Optigraphics shareholders having a principal balance of $1,634,000 payable on
demand. The notes, which had an original maturity of September 1995 and
provided for interest payable quarterly at 6% per annum, were issued as part
of the total consideration paid in connection with the acquisition of
Optigraphics Corporation. The notes were paid in full in January 1996.
At December 31, 1995, the Company had an outstanding convertible note in
connection with the acquisition of Trimco having a principal balance of
$1,000,000 payable at 7% per annum, due on September 27, 1996. The note was
convertible into common stock at a 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.
Maturities of long-term debt for each of the five years after December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $ 710,000
1998 326,000
1999 326,000
2000 299,000
2001 126,000
Thereafter 126,000
----------
$1,913,000
----------
----------
</TABLE>
33
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREFERRED STOCK:
In April 1996, the Company issued 100,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in an offshore
private placement to a purchaser who is not a resident of the United States,
in reliance on Regulation S promulgated under the Securities Act of 1933, as
amended. In consideration for the issuance and sale of the Series C
Preferred Stock, the Company received $2,000,000 in cash proceeds before
expenses. The Series C Preferred Stock bore a dividend of 8% per annum,
accruing quarterly, and was convertible into shares of the Company's common
stock after June 9, 1996, at the option of the holder, and after August 23,
1996, at the Company's option. 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 (the "Series B Preferred Stock") for total
proceeds of $3,450,000 before expenses in reliance on Regulation S
promulgated under the Securities Act of 1933, as amended. The Series B
Preferred Stock bore a dividend of 8% per annum, accruing quarterly, and was
convertible into shares of the Company's common stock after February 10,
1996, at the option of the holders, and after April 18, 1996, at the option
of the Company. In February 1996, the 172,500 shares of Series B Preferred
Stock were converted into 406,617 shares of common stock.
NOTE 8 - WARRANTS:
In December 1991, 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 exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. In connection with
this offering, the underwriter received warrants to purchase 75,000 units at
$5.10 per unit for a period of four years commencing one year from the date
of the offering. In November 1995, the underwriter exercised its option to
purchase the 75,000 units for net proceeds of $382,000. Also in 1995,
warrants were exercised for 459,446 shares of common stock for net proceeds
of $3,848,000.
NOTE 9 - COMMON STOCK OPTIONS:
At December 31, 1996, the Company had two stock-based compensation plans
(the "Plans"), which are described below. The Company applies Accounting
Principles Board No. 25 and related Interpretations in accounting for its
plans. No compensation cost has been recognized for its employee stock option
grants, which are fixed in nature, as the options have been 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:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1996 1995
----------- ------------
(Restated-Note 1)
<S> <C> <C>
Net loss
As reported $(2,448,000) $(11,830,000)
Pro forma $(3,022,000) $(12,285,000)
Pro forma net loss per share
As reported $ (0.26) $ (1.68)
Pro forma $ (0.33) $ (1.75)
</TABLE>
34
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 68% 65%
Risk-free interest rate 6.2% 6.7%
Expected lives 4 yrs. 4 yrs.
</TABLE>
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. The maximum
number of shares of Common Stock that may be issued pursuant to awards
granted under the 1996 Plan is 625,000. Under the Company's 1987 Stock
Option Plan, the maximum number of shares of Common Stock to be issued was
1,200,000 of which there is 58,050 remaining authorized shares subject to
grants but unissued.
The option vesting period for 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, disability or death, 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.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
--------------------------- ----------------------------
Weighted Weighted
Shares Average Shares Average
-------- Exercise Price -------- Exercise Price
-------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 656,775 $2.24 594,250 $ .31
Options granted 449,500 6.96 281,400 5.23
Options exercised (316,875) 4.01 (213,200) .88
Options forfeited (344,188) 7.03 (5,675) 2.08
-------- --------
Outstanding at end of year 445,212 5.12 656,775 2.24
-------- --------
-------- --------
Options exercisable at end of year 166,950 380,412
Weighted average fair value of
options granted during the year $6.36 $3.73
</TABLE>
35
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding at remaining average exercisable at average
exercise prices December 31, 1996 contractual life exercise price December 31, 1996 exercise price
- --------------- ----------------- ---------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$2.76 to $3.82 181,812 2.17 years $3.38 152,125 $3.39
$5.94 to $6.56 233,000 4.27 years $5.94 250 $6.44
$9.00 to $10.63 30,400 7.41 years $9.16 14,575 $9.16
------- -------
$2.76 to $10.63 445,212 5.05 years $5.12 166,950 $3.90
------- -------
</TABLE>
NOTE 10 - INCOME TAXES:
Deferred tax assets and liabilities are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------
(Restated-Note 1)
<S> <C> <C>
Deferred tax liability:
Purchased technology $ (262,000) $ (425,000)
------------ ------------
Deferred tax assets:
Net operating loss carryforwards 13,522,000 13,804,000
Research and development costs 1,946,000 2,054,000
Depreciation and amortization 159,000 195,000
Inventory 451,000 1,175,000
Deferred revenue 283,000 105,000
Accruals 468,000 879,000
Other 695,000 113,000
------------ ------------
Total deferred tax assets 17,524,000 18,325,000
------------ ------------
Net deferred tax assets 17,262,000 17,900,000
Valuation allowance (17,262,000) (17,600,000)
------------ ------------
Deferred taxes $ - $ 300,000
------------ ------------
------------ ------------
</TABLE>
The Company has recorded a valuation allowance amounting to the entire
net deferred tax asset balance at December 31, 1996 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 the event that tax benefits acquired in the Trimco acquisition
are realized, $626,000 of 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.
The Company has net operating loss carryforwards of $34,100,000 and
$7,600,000 for federal and state tax purposes, respectively, which expire
over the years 1997 through 2010. Net operating losses acquired from
Optigraphics are limited to offset against that entity's future taxable
income, subject to annual limitations. 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. The Company has investment and research
activity credit carryforwards aggregating $500,000, which will substantially
expire in the years 2000 through 2004.
36
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION:
The Company has one business segment which consists of the development
and sale of a suite of object-oriented, multi-tier client/server document
management software products. In 1996 one customer accounted for 12 percent
of the Company's revenues.
In 1994 and 1995 the Company operated principally in the United States
and international revenues were less than 10% of the Company's revenues.
Revenue for 1996 by customer location is as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
United States $12,778,000
Europe 5,450,000
Other International 1,321,000
-----------
$19,549,000
-----------
-----------
</TABLE>
Subsequent to the acquisition of Trimco in December 1995, the Company's
primary operations for 1996 were conducted from the United States and Europe.
Segment and operations information by geographic location for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Corporate
United Research &
States Europe Development Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $12,295,000 $7,254,000 - $19,549,000
Operating earnings (loss) 1,512,000 (571,000) $(3,363,000) (2,422,000)
Identifiable assets 10,113,000 8,147,000 - 18,260,000
</TABLE>
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 12 - COMMITMENTS:
The Company leases its principal facilities under a long-term operating
lease which includes rent escalations of 4% per annum. The lease expires in
March 2001. 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 late 1996 and recognized a loss for
the difference in the lease and sublease rate along with other costs
associated with the office closure. The leases expire in April 2001. The
Company recognizes rental expense on a straight line basis over the term of
the leases.
The Company's United Kingdom subsidiary leases facilities for terms that
end in March 2001 and August 2006. One lease has an option to terminate the
lease in March 1998.
37
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under operating lease agreements, net of
total noncancellable sublease payments of approximately $800,000, at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Operating
Lease
----------
<S> <C>
1997 $ 426,000
1998 409,000
1999 339,000
2000 348,000
2001 72,000
Thereafter 197,000
----------
Total minimum lease payments $1,791,000
----------
----------
</TABLE>
Rent expense under operating leases was $779,000, $479,000 and $268,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 13 - SUBSEQUENT EVENTS:
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. As a result of the restatement (see Note 1), the Company triggered
an event of default resulting in a dividend rate increase to 14% per annum.
The Company may redeem the Series D Convertible Preferred Stock at its
option after June 1999 if the 20 day average trading price for the common
stock preceding the redemption date 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, 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, the
redemption price per share is equal to the redemption price under the
optional redemption feature, plus the difference in the value of the
Company's common stock and conversion price on the date of redemption, if any.
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) 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.
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 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).
Debt
- ----
In June 1997, the Company issued a five year, 11.5% subordinated
debenture 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 which are exercisable
over a five year period from the date of issuance. The warrants were valued
at $585,000 and a portion of the proceeds from the debt have been allocated
to common stock warrants.
38
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
Litigation
- ----------
Between March 1998 and May 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. The complaints are class actions
filed by individuals who allege that they purchased the Company's common
stock during specified periods. The complaints allege that the Company and
the individual defendants issued false and misleading statements in the
Company's filings with the Securities and Exchange Commission and other
public statements. Management is unable to determine whether the outcome of
these complaints will have a material impact on its financial position,
results of operations and cash flows.
Resignation of CEO
- ------------------
In April 1998, the Company and the then Chief Executive Officer (the
"Former CEO") entered into a separation agreement whereby the Former CEO
resigned. Under the agreement, the Former CEO will be paid $215,000, plus
benefits, over a one year period in exchange for consulting services.
Restructuring
- -------------
As a result of significant losses and lower forecasted sales, during the
first four months of 1998, the Company restructured its operations and
reduced its payroll cost (the Company's largest cost element) by
approximately 25% from the level prevailing at the end of 1997. In addition,
the Company has made further reductions to other expenditures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
39
<PAGE>
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, 1996 and 1995
Consolidated Statement of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
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
40
<PAGE>
10.7* Form of Indemnification Agreement with officers and directors.
10.8* Warrant Agreement dated December 12, 1991 between the Company
and Security Pacific National Bank.
10.9* Sublease Agreement dated August 31, 1992 between the Company and
Unisys Corporation
10.10* Agreement and Plan of Merger and Reorganization dated as of
July 7, 1993 by and among the Company, AO Acquisition Corporation
and Optigraphics Corporation
10.11* Amendment No. 1 to Agreement and Plan of Merger and Reorganization
dated as of September 15, 1993 by and among the Company, AO
Aquisition Corporation and Optigraphics Corporation
10.12* WCMA and Term Loan Agreement dated July 6, 1994 between
Optigraphics Corporation and Merrill Lynch Business Financial
Services, Inc.
10.13* Standard Industrial Lease dated April 1, 1994 between the
Company and Utah State Retirement Fund, a common trust fund
10.14* Purchase and Sale Agreement dated December 27, 1995 by and
between the Company, Mr. Tanna and the shareholders of Trimco
Group plc (filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K dated December 27, 1995 and incorporated herein by
this reference).
10.15* Convertible Loan Note dated December 27, 1995 issued by the
Company (filed as Exhibit 2.2 to the Company's Current Report
on Form 8-K dated December 27, 1995 and incorporated herein by
this reference).
10.16* Convertible Preferred Stock Purchase Agreement dated December
20, 1995 by and between the Company and Newsun Limited (filed
as Exhibit 4.2 to the Company's Current Report on Form 8-K dated
December 27, 1995 and incorporated herein by this reference).
10.17* Convertible Preferred Stock Purchase Agreement dated December
20, 1995 by and between the Company THC, Inc. (filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K dated
December 27, 1995 and incorporated herein by this reference).
10.18* Convertible Preferred Stock Purchase Agreement, dated April 25,
1996, by and between the Company and Newsun Limited (filed as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by this
reference).
10.19* Letter Agreement dated January 2, 1996 by and among the Company,
Newsun Limited and THC, Inc. (filed as Exhibit 4.5 to the
Company's Current Report on Form 8-K dated December 27, 1995 and
incorporated herein by this reference).
10.20* WCMA and Term Loan Agreement dated October 22, 1996 between
Altris Software, Inc. and Merrill Lynch Business Financial
Services, Inc.
11 Statement Re Computation of Per Share Earnings
41
<PAGE>
21 Subsidiaries of Registrant
23 Consent of Independent Accountants
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.
42
<PAGE>
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 May 19, 1998.
ALTRIS SOFTWARE, INC.
By: /s/ John W. Low
-------------------------
John W. Low
Chief Financial 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.
<TABLE>
<S> <C> <C>
/s/ Roger Erickson Chief Executive Officer May 19, 1998
- -------------------------- (Principal Executive Officer) and Director
Roger Erickson
/s/ John W. Low Chief Financial Officer and Secretary May 19, 1998
- -------------------------- (Principal Financial and Accounting Officer)
John W. Low
/s/ Norwood H. Davis, Jr. Director May 13, 1998
- --------------------------
Norwood H. Davis, Jr.
/s/ D. Ross Hamilton Director May 19, 1998
- --------------------------
D. Ross Hamilton
/s/ Michael J. McGovern Director May 19, 1998
- --------------------------
Michael J. McGovern
/s/ Larry D. Unruh Director May 19, 1998
- --------------------------
Larry D. Unruh
/s/ Martin Atkinson Director May 13, 1998
- --------------------------
Martin Atkinson
</TABLE>
43
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALTRIS SOFTWARE, INC.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 162,000 $ 35,000 $ (72,000) (a) $ 125,000
Excess inventory reserve $ 2,323,000 $ (204,000) (b) $ 2,119,000
Tax benefit reserve $16,300,000 $ 1,300,000 (c) $17,600,000
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $ 161,000 $ 50,000 $ (49,000) (a) $ 162,000
Excess inventory reserve $ 2,540,000 $ (217,000) (b) $ 2,323,000
Tax benefit reserve $16,400,000 $ (100,000) (d) $16,300,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
44
<PAGE>
Exhibit 11
ALTRIS SOFTWARE, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------
1996 1995 1994
----------- ------------ ----------
<S> <C> <C> <C>
Net income (loss) per consolidated
financial statements $(2,448,000) $(11,830,000) $ 275,000
----------- ------------ ----------
----------- ------------ ----------
Primary net income (loss) per share:
Weighted average common shares 9,250,000 7,026,000 6,857,000
Common stock equivalents:
Common stock options - - 135,000
----------- ------------ ----------
Weighted average shares outstanding 9,250,000 7,026,000 6,992,000
----------- ------------ ----------
----------- ------------ ----------
Fully diluted net income (loss) per share:
Weighted average common shares 9,250,000 7,026,000 6,857,000
Common stock equivalents:
Common stock options - - 135,000
----------- ------------ ----------
Weighted average shares outstanding 9,250,000 7,026,000 6,992,000
----------- ------------ ----------
----------- ------------ ----------
Net income (loss) per share:
Primary $ (0.26) $ (1.68) $ .04
Fully diluted $ (0.26) $ (1.68) $ .04
</TABLE>
45
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-43451, No. 33-77224, No. 33-83330 and No.
33-24383) of Altris Software, Inc. of our report dated May 12, 1998 appearing
on page 21 of this Form 10-K/A.
/s/ PRICE WATERHOUSE LLP
San Diego, California
May 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION, AS RESTATED, EXTRACTED
FROM THE RESTATED CONSOLIDATED BALANCE SHEET AND RESTATED CONSOLIDATED STATEMENT
OF OPERATIONS FOUND ON PAGES 23 AND 24 OF THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,200
<SECURITIES> 0
<RECEIVABLES> 5,050
<ALLOWANCES> 0
<INVENTORY> 472
<CURRENT-ASSETS> 8,495
<PP&E> 7,259
<DEPRECIATION> 5,103
<TOTAL-ASSETS> 18,260
<CURRENT-LIABILITIES> 6,431
<BONDS> 0
0
0
<COMMON> 61,583
<OTHER-SE> (51,723)
<TOTAL-LIABILITY-AND-EQUITY> 18,260
<SALES> 19,549
<TOTAL-REVENUES> 19,549
<CGS> 9,540
<TOTAL-COSTS> 9,540
<OTHER-EXPENSES> 3,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (114)
<INCOME-PRETAX> (2,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,448)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
