<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15935
ALTRIS SOFTWARE, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
----------------------------------------------------
(Address of principal executive offices and zip code)
(619) 625-3000
---------------------------------------------------
(Registrants telephone number, including area code)
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
--- ---
Number of shares of Common Stock outstanding at June 11, 1998: 9,614,663
-----------
Number of Sequentially Numbered Pages: 17
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ALTRIS SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 15
</TABLE>
2
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,264,000 $ 1,938,000
Short term investments 38,000 133,000
Receivables, net 1,844,000 3,045,000
Inventory, net 475,000 460,000
Other current assets 521,000 633,000
------------ ------------
Total current assets 4,142,000 6,209,000
Property and equipment, net 2,161,000 2,270,000
Computer software, net 3,564,000 3,042,000
Goodwill, net 3,712,000 3,914,000
Other assets 360,000 401,000
------------ ------------
$ 13,939,000 $ 15,836,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,401,000 $ 2,928,000
Accrued liabilities 2,336,000 2,758,000
Notes payable 979,000 730,000
Deferred revenue 2,851,000 1,770,000
------------ ------------
Total current liabilities 8,567,000 8,186,000
Long term notes payable 801,000 274,000
Other long term liabilities 225,000 173,000
Subordinated debt, net of discount 2,503,000 2,473,000
------------ ------------
Total liabilities 12,096,000 11,106,000
------------ ------------
Commitments:
Mandatorily redeemable convertible preferred stock,
$1,000 par value, 3,000 shares authorized;
3,000 shares issued and outstanding ($2,682,000 total
liquidation preference) 2,682,000 2,682,000
Shareholders' equity:
Common stock, no par value, 20,000,000 shares authorized;
9,614,663 and 9,614,663 issued and outstanding,
respectively 61,513,000 61,600,000
Common stock warrants 585,000 585,000
Foreign currency translation adjustment (5,000) 25,000
Accumulated deficit (62,932,000) (60,162,000)
------------ ------------
Total shareholders' equity (839,000) 2,048,000
------------ ------------
$ 13,939,000 $ 15,836,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 3,001,000 $ 3,985,000
Cost of revenues 1,801,000 2,142,000
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Gross profit 1,200,000 1,843,000
------------- -------------
Operating expenses:
Research and development 743,000 916,000
Marketing and sales 1,669,000 1,744,000
General and administrative 1,034,000 754,000
Restructuring expense 376,000 -
------------- -------------
Total operating expenses 3,822,000 3,414,000
------------- -------------
Loss from operations (2,622,000) (1,571,000)
Interest and other income 15,000 22,000
Interest and other expense (163,000) (51,000)
------------- -------------
Loss before income taxes (2,770,000) (1,600,000)
Provision for income taxes - -
------------- -------------
Net loss $ (2,770,000) $ (1,600,000)
------------- -------------
------------- -------------
Basic net loss per common share $ (.30) $ (.17)
------------- -------------
------------- -------------
Diluted net loss per common share $ (.30) $ (.17)
------------- -------------
------------- -------------
Shares used in computing basic and diluted
net loss per common share 9,615,000 9,565,000
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $(2,770,000) $(1,600,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 594,000 599,000
Changes in assets and liabilities:
Receivables, net 1,201,000 650,000
Inventory (15,000) (67,000)
Other assets 135,000 (305,000)
Accounts payable (527,000) 492,000
Accrued liabilities (422,000) (179,000)
Deferred revenue 1,081,000 (41,000)
Other long term liabilities 52,000 (451,000)
----------- -----------
Net cash used in operating activities (671,000) (902,000)
----------- -----------
Cash flows from investing activities:
Sale of short term investment - 85,000
Maturity of short term investment 95,000 -
Purchases of property and equipment (78,000) (122,000)
Purchases of software (118,000) (39,000)
Computer software capitalized (561,000) (371,000)
----------- -----------
Net cash used in investing activities (662,000) (447,000)
----------- -----------
Cash flows from financing activities:
Repayments under notes payable (50,000) (174,000)
Net borrowings under revolving loan and bank agreements 826,000 663,000
Payment of preferred stock dividends (87,000) -
Proceeds from exercise of stock options - 47,000
----------- -----------
Net cash provided by financing activities 689,000 536,000
----------- -----------
Effect of exchange rate changes on cash (30,000) 53,000
----------- -----------
Net decrease in cash and cash equivalents (674,000) (760,000)
Cash and cash equivalents at beginning of period 1,938,000 2,200,000
----------- -----------
Cash and cash equivalents at end of period $ 1,264,000 $ 1,440,000
----------- -----------
----------- -----------
Supplemental cash flow information:
Interest paid $ 101,000 $ 44,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Altris Software, Inc. (the
"Company") as of March 31, 1998 and the consolidated statement of operations and
of cash flows for the three month periods ended March 31, 1998 and 1997 are
unaudited. The consolidated financial statements and related notes have been
prepared in accordance with generally accepted accounting principles applicable
to interim periods. In the opinion of management, the consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
position, operating results and cash flows for the periods presented.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
NOTE 2 - NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), "Earnings per Share," for fiscal 1997 and retroactively restated
all prior periods to conform with FAS 128 as required. Basic net income per
common share is computed as net income less accretion of dividends on
mandatorily redeemable convertible preferred stock divided by the weighted
average number of common shares outstanding during the period. Diluted net
income per common share is computed as net income divided by the weighted
average number of common shares and potential common shares, using the treasury
stock method, outstanding during the period and assumes conversion into common
stock at the beginning of each period of all outstanding shares of convertible
preferred stock. Computations of basic and diluted earnings per share do not
give effect to individual potential common stock instruments for any period in
which their inclusion would be anti-dilutive.
NOTE 3 - RECEIVABLES
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Billed receivables $ 1,812,000 $ 3,111,000
Unbilled receivables 315,000 219,000
Less allowance for doubtful accounts (283,000) (285,000)
----------- -----------
$ 1,844,000 $ 3,045,000
----------- -----------
----------- -----------
</TABLE>
NOTE 4 - INVENTORY
Inventory consists of parts, supplies, and subassemblies primarily used in
maintenance contracts which service the Company's hardware products sold in
prior years. Inventory is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. As of March 31, 1998
and December 31, 1997, the Company's reserve against excess quantities totaled
$541,000 and $511,000, respectively.
6
<PAGE>
NOTE 5 - NOTES PAYABLE AND SUBORDINATED DEBT
In August 1997, the Company's United Kingdom subsidiary renewed an
overdraft facility with a bank with interest calculated at 2.0% per annum over
the bank's base rate (9.25% at March 31, 1998 and December 31, 1997). The
facility is payable on demand. At March 31, 1998 and December 31, 1997,
$646,000 and $430,000, respectively, was outstanding. The property and assets
of the Company's United Kingdom subsidiary secure repayment of the borrowings
under the facility. The Company has executed a guarantee in connection with the
facility.
In June 1997, the Company issued a five-year, 11.5% subordinated debenture
("the Subordinated Debenture") with quarterly interest payments for gross
proceeds of $3,000,000. In conjunction with the debt, the Company granted
warrants to purchase 300,000 shares of the Company's common stock at an exercise
price of $6.00 per share 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 has been allocated to common stock warrants.
In the event the debt is outstanding at June 2000, and each year
thereafter, the Company will grant in each year, additional five year warrants
to purchase 50,000 shares of common stock at an exercise price of $7.00 per
share. A value has not been ascribed to these contingent warrants. At such
time that the warrants are no longer contingent, a value will be ascribed, if
any. As of December 31, 1997 the Company was in violation of certain covenants
contained in the subordinated debenture agreement. The Company obtained a
waiver of such violations in May 1998, which extends for one year from the date
of the waiver.
In March 1997, the Company borrowed $300,000 from an officer of the
Company. The terms of the agreement were for a maximum of a three month period
with a 12% per annum interest rate. The entire balance and accrued interest was
paid in July 1997.
The Company has two revolving loan and security agreements, each
providing for borrowings of up to $1,000,000. The maximum credit available
under each facility declines by $200,000 each year in March and September
beginning in 1997 and 1996, respectively. Each loan is payable in monthly
installments of $16,667. At March 31, 1998, $1,134,000 was outstanding with
no additional funds available on the facility. At December 31, 1997,
$574,000 was outstanding and $793,000 was unused on these facilities. 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% (8.48% and 8.80% at March 31, 1998 and
December 31, 1997, respectively). The revolving loan and security agreements
contain certain restrictive covenants including the maintenance of a minimum
ratio of debt to tangible net worth. As of December 31, 1997 the Company was
in violation of such covenants. The Company obtained a waiver of such
violations existing on and prior to December 31, 1997. In addition, the
lender has also waived the debt to tangible net worth covenant through May
1999.
NOTE 6 - 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. Commencing in
March 1998 the Company has been in default of certain covenants, 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 an average trading price for the common stock equals
or exceeds $9.50 per share or after June 2002, irrespective of the trading
price. The Series D Preferred Stock redemption price per share is equal to the
sum of $1,000, 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
7
<PAGE>
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 appreciation in the value
of the Company's common stock and conversion price on the date of redemption.
In connection with the issuance of the Series D Preferred Stock, the
Company has agreed to grant warrants to purchase the following number of shares
of its common stock if the Series D Preferred Stock remains outstanding on each
of the following dates: (i) 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. Such
warrants are exercisable over a five year period from the date of grant. A
value has not been ascribed to these contingent warrants. At such time that the
warrants are no longer contingent, a value will be ascribed, if any. In
connection with the debt (see Note 5) and Series D Convertible Preferred Stock
issuance, the Company paid $120,000 to a director of the Company for his service
related to the offering.
Each share of Series D Preferred Stock is entitled to one vote on all
matters submitted to the holders of the common stock. In the event of
liquidation of the Company, the Series D Preferred Stockholders will receive in
preference to the common stockholders an amount equal to $1,000 per share plus
accrued but unpaid dividends and interest on all such dividends at an annual
rate of 11.5% (increased to 14% as a result of the event of default).
NOTE 7 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
<TABLE>
<CAPTION>
For the three months
ended March 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Net Loss Used:
Net loss $ (2,770,000) $ (1,600,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (87,000) -
----------- -----------
Net loss used in computing basic and diluted net
loss per share $ (2,857,000) $ (1,600,000)
----------- -----------
----------- -----------
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 9,615,000 9,565,000
----------- -----------
----------- -----------
</TABLE>
8
<PAGE>
NOTE 8 - LITIGATION
During March 1998 through 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
Revenues
Revenues for the three months ended March 31, 1998 were $3,001,000 as
compared to $3,985,000 for the three months ended March 31, 1997. The 23%
decrease in revenues is primarily due to a decline in sales of new large
systems.
First quarter 1998 revenues consisted of $1,002,000 (33%) in new system
revenues and $1,999,000 (67%) related to system enhancements, expansion and
maintenance. This compares to first quarter 1997 revenue of $1,949,000 (49%) in
new system revenues and $2,036,000 (51%) related to system enhancements,
expansion and maintenance. 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.
For the quarter ended March 31, 1998, new system revenues decreased
$947,000 from the same period in 1997 while revenues generated from system
enhancements, expansion and maintenance decreased $37,000. In 1997, the Company
devoted substantial sales and marketing efforts to its anticipated Altris EB-TM-
product, the availability of which has been substantially delayed as a result of
unanticipated problems in the performance of the product. Management believes
that the Company's inability to provide the Altris EB product, which was to
address the needs of new customers for additional features and functionality,
was the principal cause for the decline in revenues for the quarter ended March
31, 1998 as compared to the same period in 1997.
A small number of customers have typically accounted for a large percentage
of the Company's annual revenue, although no customer accounted for more than
10% of total revenue in the first quarter of 1998 or 1997. One consequence of
this dependence has been that revenue can fluctuate significantly on a quarterly
basis. The Company's reliance on relatively few customers could have a material
adverse effect on the results of its operations on a quarterly basis.
Additionally, a significant portion of the Company's revenues has historically
been derived from the sale of systems to new customers.
Cost of Revenues
Gross profit as a percentage of revenues was 40% for the first quarter 1998
compared to 46% for the same period a year ago. The decrease in gross profit
margin was due primarily to a reduction in revenues which resulted in fixed
costs representing a greater proportion of revenues in the first quarter 1998
compared to the same period in 1997. Software license revenue was $891,000
(30%) of total revenues in the first quarter 1998 compared to $2,134,000 (54%)
of total revenues in the first quarter of 1997. Hardware sales, which have a
lower margin than software, decreased from $256,000 in the first quarter 1997 to
$61,000 in the first quarter 1998. Service revenues, which include maintenance,
training and consulting services, increased to $2,049,000 in the first quarter
1998 from $1,595,000 in the first quarter 1997. 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 for such third party products. Gross
profit percentages can fluctuate quarterly based on the revenue mix of Company
software, services and third party software or hardware.
10
<PAGE>
Operating Expenses
Research and development expense for the three months ended March 31, 1998
was $743,000 versus $916,000 for the same period in the prior year. The
decrease in research and development was due to a reduction in personnel.
Research and development expense can vary year to year based on the amount of
engineering service contract work required for customers versus purely internal
development projects. It may also vary based on internal development projects
in which technological feasibility and marketability of a product are
established. These costs are capitalized as incurred and then amortized when
the product is available for general release to customers. Technical expenses
on customer-funded projects are included in cost of revenues, while expenses on
internal projects are included in research and development expense. Technical
expenses on customer-funded projects for the quarter were $723,000 versus
$704,000 in the first quarter of 1997.
Marketing and sales expense for the three months ended March 31, 1998 was
$1,669,000 versus $1,744,000 for the three months ended March 31, 1997. The
decrease is primarily attributable to a reduction in marketing and promotional
costs incurred along with a reduction in personnel.
General and administrative expense was $1,034,000 for the three months
ended March 31, 1998 as compared to $754,000 for the three months ended March
31, 1997. The increase in general and administrative expense was due primarily
to increased legal, accounting and consultancy costs associated with the
Company's amendment of its financial statements for fiscal year 1996 and the
three interim quarters in 1997.
During the quarter ended March 31, 1998, the Company incurred $376,000 in
restructuring charges resulting primarily from severance costs including amounts
owed under a Separation Agreement between the Company and its former CEO.
Interest and other expense was $163,000 for the three months ended March
31, 1998 versus $51,000 for the three months ended March 31, 1997. The increase
was due to a higher debt balance coupled with a higher rate of interest paid on
the Company's debt at March 31, 1998 versus the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash and cash equivalents totaled
$1,264,000 as compared to $1,938,000 at December 31, 1997, and its current
ratio was .5 to 1. The Company's short-term investments totaled $38,000 at
March 31, 1998, as compared to $133,000 at December 31, 1997. The Company
has two revolving credit facilities that provide for borrowings of up to
$1,367,000. At March 31, 1998, $1,134,000 was outstanding on the revolving
loan agreements with no additional funds available on the facility. In
addition, the Company's U.K. subsidiary has an overdraft credit facility of
$646,000. The outstanding balance on this facility is payable on demand of
the lender. At March 31, 1998, the Company had utilized all of this credit
facility. The Company has guaranteed the borrowings on this facility. See
Note 5 of the Notes to the Consolidated Financial Statements.
Certain events of default under each of the Company's revolving loan
agreements and under the Subordinated Debenture occurred as a result of a
restatement of the Company's interim financial information and annual
financial statements for 1996 and the interim information for the first three
quarters of 1997 which restatement was announced in May 1998. The lenders
under such agreements and the Subordinated Debenture have agreed to waive
such events of default for 1997 in the case of the lender under the Company's
revolving loan agreements and for a period of one year expiring in May 1999
in the case of the holder of the Subordinated Debenture. Such lender and
holder have also waived compliance with certain financial convenants for one
year expiring in May 1999. There can be no assurances that the Company will
be able to secure from its lenders a further waiver of any events of default
after May 1999. If such events of default are not then waived, the Company
may then be required to repay the full amount of its outstanding indebtedness
under the revolving credit agreements and the Subordinated Debenture.
Defaults in the payment of such indebtedness or in the performance of other
covenants under the agreements related to such indebtedness, whether
occurring prior to or after May 1999, could also result in the Company being
required to repay the full amount of such indebtedness. In addition, because
the overdraft credit facility of the Company's U.K. subsidiary is payable
upon demand, the Company could be required at any time to repay all
outstanding borrowings under such
11
<PAGE>
facility. The repayment of such indebtedness would require additional debt or
equity financing. There can be no assurances that any such financing would be
available.
During the first quarter of 1998, cash provided by financing activities
totaled $689,000 while cash used in operating and investing activities totaled
$671,000 and $662,000, respectively. Cash provided by financing activities was
from net borrowings under revolving loan and bank agreements. During the first
quarter of 1997, cash used in operating and investing activities totaled
$902,000 and $447,000, respectively, while cash provided by financing activities
totaled $536,000.
Due to significant losses incurred in 1997 and lower forecasted sales, the
Company has restructured its operations and reduced its payroll cost, the
largest cost element, by approximately 25% from the level prevailing at the end
of 1997. In addition, the Company has made further reductions of other
expenditures. However, the Company is investigating raising additional cash
through a debt or equity offering. The Company believes that as the result of
the reduction of its costs through the restructuring of its operations, the
unused portion of the Company's credit facilities, and funds generated from
operations will be adequate to meet expected short-term needs for working
capital. However, the Company's ability to continue operations without
additional capital is dependent upon the Company's ability to sustain revenues
from its existing customer base and to sell new systems. Given the substantial
uncertainties confronting the Company, there can be no assurance that sufficient
cash flows will be generated by the Company to avoid the further depletion of
its working capital. Accordingly, the Company is seeking additional equity
or debt 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. Failure to obtain
additional financing, if and when needed, could have a material adverse affect
on the Company's business, results of operations, and financial condition.
Net Operating Loss Tax Carryforwards
As of December 31, 1997, the Company had a net operating loss carryforward
("NOL") for federal and state income tax purposes of $40,549,000 and
$10,239,000, respectively. In addition, the Company generated but has not used
research and investment tax credits for federal income tax purposes of
approximately $500,000, which will substantially expire in the years 2000
through 2005. Under the Internal Revenue Code of 1986, as amended (the "Code"),
the Company generally would be entitled to reduce its future Federal income tax
liabilities by carrying unused NOL forward for a period of 15 years to offset
future taxable income earned, and by carrying unused tax credits forward for a
period of 15 years to offset future income taxes. However, the Company's
ability to utilize any NOL and credit carryforwards in future years may be
restricted in the event the Company undergoes an "ownership change," generally
defined as a more than 50 percentage point change of ownership by one or more
statutorily defined "5-percent stockholders" of a corporation, as a result of
future issuances or transfers of equity securities of the Company within a
three-year testing period. In the event of an ownership change, the amount of
NOL attributable to the period prior to the ownership change that may be used to
offset taxable income in any year thereafter generally may not exceed the fair
market value of the Company immediately before the ownership change (subject to
certain adjustments) multiplied by the applicable long-term, tax-exempt rate
announced by the Internal Revenue Service in effect for the date of the
ownership change. A further limitation would apply to restrict the amount of
credit carryforwards that might be used in any year after the ownership change.
As a result of these limitations, in the event of an ownership change, the
Company's ability to use its NOL and credit carryforwards in future years may be
delayed and, to the extent the carryforward amounts cannot be fully utilized
under these limitations within the carryforward periods, these carryforwards
will be lost. Accordingly, the Company may be required to pay more Federal
income taxes or to pay such taxes sooner than if the use of its NOL and credit
carryforwards were not restricted.
Over the past five years the Company has issued equity securities in
connection with the private placement in June 1997, the Trimco acquisition in
December 1995, the Optigraphics acquisition in September 1993 and through
traditional stock option grants to employees. Although there was no "ownership
change" in 1997, this activity, combined with the liquidity available to
stockholders, increases the potential for an "ownership change" for income tax
purposes.
12
<PAGE>
In connection with the acquisition of Trimco, the Company acquired
deferred tax assets of approximately $926,000 of which approximately $626,000
was provided as a valuation allowance. In June 1997, the $300,000 tax asset
was realized and a reduction to goodwill was recorded. In the event that
remaining tax benefits acquired in the Trimco acquisition are realized, 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' net operating losses which are limited to offset against that
entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Uncertain Impact of Restatement of Financial Statements
In May 1998 the Company reported restated financial results for 1996 and
the first three quarters of 1997. See the Company report on Form 10-K for
the year ended December 31, 1997 (the "Form 10-K"). In addition, the report
of the Company's independent accountants, Price Waterhouse LLP, on the
Company's consolidated financial statements as of and for the year ended
December 31, 1997 includes an explanatory paragraph regarding the Company's
ability to continue as a going concern. See "Report of Independent
Accountants" accompanying the Consolidated Financial Statements in the Form
10-K. The Company's public announcement of the restatement of its financial
statements, delays in reporting operating results for the year ended December
31, 1997 while the restatement was being compiled, delays in reporting first
quarter of 1998 results, the de-listing of the Company's Common Stock from
the Nasdaq National Market, corporate actions to restructure operations and
reduce operating expenses, and customer uncertainty regarding the Company's
financial condition are likely to have a material adverse effect on the
Company and its ability to sell its products in the future.
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. In the first quarter 1998,
revenue from the United States, Europe and other locations in the world were
60%, 36% and 4%, respectively. This compares to 61%, 37% and 2%, respectively
for the same period in 1997. The European currencies have been relatively
stable against the U.S. dollar for the past several years. As a result, foreign
currency fluctuations have not had a significant impact on the Company's
revenues or results of operations. The Company has recently increased its sales
efforts in international markets outside Europe, including Asia and Latin
America, whose currencies have tended to fluctuate more relative to the U.S.
dollar. In addition, the current continued weakness in Asian currencies may
result in reduced revenues from the countries affected by this condition.
Changes in foreign currency rates, the condition of local economies, and the
general volatility of software markets may result in higher or lower proportion
of foreign revenues in the future. Although the Company's operating and pricing
strategies take into account changes in exchange rates over time, there can be
no assurance that future fluctuations in the value of foreign currencies will
not have a material adverse effect on the Company's business, operating results
and financial condition.
New Accounting Pronouncements
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 adopted the provisions
of SOP 97-2 as of January 1, 1998 and as a result, changed certain business
practices. SOP 98-4 is effective as of March 31, 1998. The adoption has, in
certain circumstances, resulted in the deferral of software license revenues
that would have been recognized upon delivery of the related software under
preceding accounting standards. At this time the Company cannot quantify the
effect that SOP 97-2 will have on its operating results, financial position or
cash flows.
13
<PAGE>
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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company has recently commenced a program, to be substantially completed
by the Fall of 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. In addition, the Company is
considering converting certain of its software and systems to commercial
products that are known to be Year 2000 compliant. Implementation of software
products of third parties, however, will require the dedication of substantial
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999. Software or
systems which are deemed critical to the Company's business are scheduled to be
Year 2000 compliant by the end of 1998. Nevertheless, particularly to the
extent the Company is relying on the products of other vendors to resolve Year
2000 issues, there can be no assurances that the Company will not experience
delays in implementing such products. If key systems, or a significant number
of systems were to fail as a result of Year 2000 problems or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business and
results of operations.
The Company, in its ordinary course of business, tests and evaluates its
own software products. The Company believes that its software products are
generally Year 2000 compliant, meaning that the use or occurrence of dates on or
after January 1, 2000 will not materially affect the performance of the
Company's software products with respect to four digit date dependent data or
the ability of such products to correctly create, store, process and output
information related to such date data. To the extent the Company's software
products are not fully Year 2000 compliant, there can be no assurance that the
Company's software products contain all necessary software routines and codes
necessary for the accurate calculation, display, storage and manipulation of
data involving dates. In addition, in certain circumstances, the Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
To date, the Company has not created a separate budget for investigating
and remedying issues related to Year 2000 compliance whether involving the
Company's own software products or the software or systems used in its internal
operations. There can be no assurances that Company resources spent on
investigating and remedying Year 2000 compliance issues will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by the Company, which could have an adverse
effect on the Company's business, results of operations and financial condition.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Between March 16, 1998 and May 1, 1998, six complaints alleging
violations of the federal securities laws were filed against the Company and
certain of its present and former officers and directors in the United States
District Court for the Southern District of California. The complaints are
purported class actions filed by individuals who allege that they purchased
the Company's stock during the purported class periods. The first complaint
alleges a class period of October 30, 1996 through October 7, 1997. The five
complaints filed thereafter allege a class period of April 17 or 18, 1996
through March 11 or 13, 1998. In addition to the Company, all six complaints
name Jay V. Tanna and John W. Low as defendants. Two of the complaints also
name Stephen P. Gardner as a defendant.
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, reports to investors, press releases, statements to
securities analysts and other public statements regarding the Company's
financial results, its future prospects and the success of its new products.
Plaintiffs allege that the Company's financial results for 1996 and the first
three quarters of 1997 were falsely reported through improper revenue
recognition on sales made through the Company's VAR customers. The complaints
allege violations of sections 10(b) and 20(a) of the Securities Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek certification as class
actions, compensatory damages in unspecified amounts, prejudgment and
postjudgment interest, attorneys fees, expert witness fees and other costs, and
unspecified extraordinary equitable and/or injunctive relief.
The parties in the cases in which the complaints have been served have
entered into stipulations regarding the schedule for plaintiffs to file
motions to consolidate the cases and to appoint lead plaintiffs and lead
plaintiffs' counsel and for defendants to respond to the complaints. The
plaintiffs' motions for selection of lead plaintiff and lead plaintiff's
counsel and to consolidate are scheduled for hearing by the court on August
28, 1998. Defendants have not filed any answers, motions to dismiss or other
responsive pleadings in these cases. In accordance with the stipulations,
defendants will respond to these actions following the filing of a
consolidated amended complaint.
The pending federal securities actions are at a very early stage. No
motions or responsive pleadings have been filed and no discovery has begun.
Consequently, at this time it is not reasonably possible to predict whether the
Company will incur any liability or to estimate the damages, or the range of
damages, that the Company might incur in connection with such actions. However,
the uncertainty associated with substantial
15
[6~<PAGE>
unresolved litigation can be expected to have a material adverse impact on
the Company's business. In particular, such litigation could impair the
Company's relationships with existing customers and its ability to obtain new
customers. Defending such litigation will likely result in a diversion of
management's time and attention away from business operations, which could
have a material adverse effect on the Company's results of operations. Such
litigation may also have the effect of discouraging investors or lenders from
providing additional equity or debt to the Company and discouraging potential
acquirors from seeking to acquire the Company or reducing the consideration
such acquirors would otherwise be willing to pay in such an acquisition.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Company has defaulted on certain debentures and preferred stock. See
Notes 5 and 6 of the Consolidated Financial Statements and Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
ITEM 5 - OTHER INFORMATION
As of June 3, 1998 the Company announced that its shares have been delisted
from The NASDAQ Stock Market effective June 1, 1998. Upon the filing of the
Company's Quarterly Report on Form 10Q for the three months ended March 31,
1998, shares of the Company's common stock are expected to be eligible for
trading on the OTC Bulletin Board if and when any market maker elects to make a
market in the shares.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Form 8-K, dated March 10, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ALTRIS SOFTWARE, INC.
By: /s/John W. Low
---------------------------------------
John W. Low
Chief Financial Officer
Dated: June 23, 1998
------------------------------------
17
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE
MAR. 31 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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