<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, 2000
[ ] 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)
(858) 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 April 14, 2000: 13,121,234
----------
Number of Sequentially Numbered Pages: 15
<PAGE>
ALTRIS SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Condensed 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
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ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 213,000 $ 142,000
Receivables, net 260,000 355,000
Other current assets 91,000 92,000
------------ ------------
Total current assets 564,000 589,000
Property and equipment, net 390,000 436,000
Computer software, net 3,485,000 3,707,000
Other assets 202,000 249,000
------------ ------------
Total assets $ 4,641,000 $ 4,981,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,563,000 $ 1,507,000
Accrued liabilities 1,346,000 1,512,000
Notes payable 777,000 574,000
Deferred revenue 2,406,000 2,289,000
------------ ------------
Total current liabilities 6,092,000 5,882,000
Deferred revenue, long term portion 1,402,000 1,542,000
Other long term liabilities 1,344,000 1,223,000
Subordinated debt, net of discount 2,737,000 2,708,000
------------ ------------
Total liabilities 11,575,000 11,355,000
------------ ------------
Mandatorily redeemable convertible preferred stock, $1,000 par value, 3,000
shares authorized; 3,000 shares issued and outstanding ($3,875,000 and
$3,770,000 total liquidation preference, respectively) 3,528,000 3,423,000
Shareholders' deficit:
Common stock, no par value, 30,000,000 shares authorized;
13,121,234 and 13,101,734 issued and outstanding,
respectively 62,997,000 63,097,000
Common stock warrants 718,000 718,000
Accumulated deficit (74,177,000) (73,612,000)
------------ ------------
Total shareholders' deficit (10,462,000) (9,797,000)
------------ ------------
Total liabilities and shareholders' deficit $ 4,641,000 $ 4,981,000
============ ============
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Licenses $ 240,000 $ 772,000
Services and other 1,427,000 1,613,000
------------ ------------
Total revenue 1,667,000 2,385,000
Cost of revenues:
Licenses 277,000 305,000
Services and other 737,000 1,067,000
------------ ------------
Total cost of revenues 1,014,000 1,372,000
------------ ------------
Gross profit 653,000 1,013,000
------------ ------------
Operating expenses:
Research and development 415,000 1,011,000
Marketing and sales 316,000 765,000
General and administrative 341,000 1,447,000
------------ ------------
Total operating expenses 1,072,000 3,223,000
------------ ------------
Loss from operations (419,000) (2,210,000)
Interest and other income 1,000 9,000
Interest and other expense (147,000) (163,000)
------------ ------------
Net loss $ (565,000) $ (2,364,000)
============ ============
Basic net loss per common share $ (.05) $ (.26)
============ ============
Diluted net loss per common share $ (.05) $ (.26)
============ ============
Shares used in computing basic and diluted
net loss per common share 13,122,000 9,615,000
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements
4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
Ended March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (567,000) $(2,364,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 316,000 1,085,000
Changes in assets and liabilities:
Receivables, net 95,000 633,000
Inventory -- 2,000
Other assets 40,000 51,000
Accounts payable 56,000 142,000
Accrued liabilities (166,000) 161,000
Deferred revenue (23,000) 269,000
Other long term liabilities 121,000 (101,000)
----------- -----------
Net cash used in operating activities (128,000) (122,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (9,000) --
----------- -----------
Net cash used in investing activities (9,000) --
Cash flows from financing activities:
Borrowings under revolving loan and bank agreements 225,000 8,000
Repayments of revolving loan and bank agreements (22,000) (100,000)
Net proceeds from exercise of stock options 5,000 --
----------- -----------
Net cash provided by (used in) financing activities 208,000 (92,000)
----------- -----------
Effect of exchange rate changes on cash -- 75,000
Net increase (decrease) in cash and cash equivalents 71,000 (139,000)
Cash and cash equivalents at beginning of period 142,000 530,000
----------- -----------
Cash and cash equivalents at end of period $ 213,000 $ 391,000
=========== ===========
Supplemental cash flow information:
Interest paid during the period $ 99,000 $ 108,000
=========== ===========
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 105,000 $ 105,000
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - LIQUIDITY AND CAPITAL RESOURCES
Altris Software, Inc. (the Company) has suffered recurring losses
and has an accumulated deficit of $74,177,000, a working capital deficit of
$5,528,000 and a deficit in shareholders' equity of $10,462,000 as of March
31, 2000, which raise substantial doubt about the Company's ability to
continue as a going concern. To address these financial concerns, in April
2000, the Company completed a transaction with Spescom Ltd., a South African
company which owns 26% of the Company. Under the terms of the transaction the
Company converted the subordinated debt of $3,000,000 and preferred stock of
$3,000,000 owned by Spescom, along with accrued interest and dividends into
9,528,096 shares of common stock. In addition, Spescom purchased 5,258,714
shares of common stock for $3,700,000 in cash. (See note 10). Management
believes that such additional cash infusion is adequate to meet its
short-term needs for working capital.
NOTE 2 - BASIS OF PRESENTATION
The information contained in the following Condensed Notes to the
Financial Statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included herein
should be reviewed in conjunction with the consolidated financial statements and
related notes thereto contained in the Company's 1999 Annual Report to
Shareholders. It should be understood that the accounting measurements at
interim dates inherently involve greater reliance on estimates than at year-end.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
The accompanying balance sheet of the Company as of March 31, 2000 and
the consolidated statement of operations and of cash flows for the three month
periods ended March 31, 2000 and 1999 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 financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
NOTE 3 - SPESCOM AND RELATED PARTIES
In May 1999, the Company completed a transaction with Spescom, whereby
Spescom invested $1,800,000 for 2,000,000 shares of the Company's common stock.
In addition, as part of the transaction, Spescom paid the Company an additional
$1,000,000 and invested $1,200,000 directly into the Company's United Kingdom
subsidiary, Altris Software Ltd. ("ASL") for a 60% ownership interest in ASL. In
conjunction with the transaction, the Company contributed $400,000 into ASL and
retained a 40% interest in ASL. As of March 31, 2000 the Company has deferred
$125,000 of the proceeds for potential warranty claims.
Other terms of the transaction included Spescom's right to nominate one
director for election to the Company's board of directors. In addition, the
shares of stock representing the Company's 40% interest in ASL have been pledged
to Spescom to secure the obligations of the Company to Spescom, such pledge not
to extend beyond the second anniversary of the closing date.
In addition, the Company entered into a distribution agreement with ASL
which grants ASL exclusive distribution rights for the Company's products around
the world, excluding North and South America and the Caribbean. Under this
distribution agreement, this exclusivity is contingent upon ASL meeting certain
minimum royalty commitments beginning in 2002. The agreement provides for a
royalty to the Company on sales of the
6
<PAGE>
Company's products by ASL and at March 31, 2000 royalties to the Company totaled
$80,000. The Company had a receivable from ASL in the amount of $18,000 at March
31, 2000.
Also as part of the May 1999 transaction, the Company became Spescom's
exclusive distributor of EMS 2000, Spescom's configuration management (CM)
product, in North and South America and the Caribbean. At March 31, 2000 the
Company had an accounts payable to Spescom of $95,000.
In order for the Company to obtain consent to this Spescom transaction
by the investor holding the Company's subordinated debenture and the Company's
Series D Convertible Preferred Stock ("the Investor") to the May 1999 Spescom
transaction, the interest rate on the subordinated debenture was increased from
11.5% to 12% (see Note 6). In addition, the Series D Convertible Preferred Stock
was exchanged for Series E Convertible Preferred Stock with substantially
similar terms except that the conversion rate was adjusted from $6.00 per share
of common stock to $1.90 and the exercise price on warrants entitling the
Investor to purchase 300,000 shares of the Company's common stock was also
adjusted from $6.00 to $1.90 per share.
In December 1999, Spescom acquired the subordinated debt and Series E
Preferred Stock in a separate transaction directly from the Investor (See Note
6). In January 2000, the Company's Board of Directors agreed to issue to Spescom
5,285,714 shares of common stock for $3,700,000 in cash, subject to approval by
the Company's shareholders. In addition, the subordinated debt and Series E
convertible preferred stock, along with related accrued interest and dividends,
was to be converted at the rate of $0.70 per share into 9,528,096 shares of
common stock. As part of the transaction, the Company will acquire for $200,000
all the rights to Spescom's EMS 2000 software, which is currently being
integrated with the Altris eB(R) product. The Company has also agreed tO
transfer its remaining 40% share of ASL, with no remaining carrying value, to
Spescom. In April 2000 this transaction was completed (See Note 10).
NOTE 4 - RECEIVABLES
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Billed receivables $ 292,000 $ 424,000
Unbilled receivables 37,000 --
Less allowance for doubtful accounts (69,000) (69,000)
--------- ---------
$ 260,000 $ 355,000
========= =========
</TABLE>
NOTE 5 - 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 both March 31,
2000 and December 31, 1999, the Company has fully reserved the carrying amount
of inventory.
NOTE 6 - NOTES PAYABLE AND SUBORDINATED DEBT
Notes payable and subordinated debt consist of the following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Revolving loans $ 450,000 $ 474,000
Short term loan 327,000 100,000
---------- ----------
777,000 574,000
Subordinated debt, less discount of $263,000
and $292,000 respectively 2,737,000 2,708,000
---------- ----------
$3,514,000 $3,282,000
========== ==========
</TABLE>
7
<PAGE>
The Company has a revolving loan and security agreement, which provides
for borrowings of up to $1,000,000. The maximum credit available under the
facility declines by $200,000 each year beginning in March 1997. The loan is
payable in monthly installments of $16,667 plus interest equal to the 30-day
Commercial Paper Rate plus 2.95% (9.00% December 31, 1999). At March 31, 2000,
$450,000 was outstanding under the agreement with no additional funds available.
Total borrowings under the revolving loan and security agreement are
collateralized by the Company's assets. The revolving loan and security
agreement contains certain restrictive covenants, including the maintenance of a
minimum ratio of debt to tangible net worth, for which the Company was in
violation at December 31, 1999. The Company obtained a waiver of such violations
through March 15, 2000. In May 1999, in order to obtain the consent for the
Spescom transaction from the lender, the Company agreed to reduce the principal
balance of the combined facilities by a total of $150,000 on or before June 30,
1999. The Company has not made the payment and is in violation of the agreement.
In April 2000 as part of the transaction with Spescom, this credit facility was
paid off (See Note 10).
In November 1999, the Company received a short-term loan of $100,000
from Spescom with interest at 10%. In February 2000, the Company received an
additional short term loan of $225,000 from Spescom with interest at 12%. In
April 2000 as part of the transaction with Spescom, both loans were paid off
(See Note 10).
NOTE 7 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
Basic net loss per common share is computed as net loss plus accretion
of dividends on mandatorily redeemable convertible preferred stock divided by
the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed as net loss divided by the
weighted average number of common shares and potential common shares, using the
treasury stock method, outstanding during the period and assumes conversion into
common stock at the beginning of each period of all outstanding shares of
convertible preferred stock. Computations of basic and diluted earnings per
share do not give effect to individual potential common stock instruments for
any period in which their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
For the three months
Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Loss Used:
Net loss $ (565,000) $ (2,364,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (105,000) (105,000)
------------ ------------
Net loss used in computing basic and diluted net
loss per share $ (670,000) $ (2,469,000)
============ ============
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 13,122,000 9,615,000
============ ============
</TABLE>
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company has one business segment which consists of the development
and sale of a suite of client/server document management software products.
8
<PAGE>
Revenues for March 31, 2000 and 1999 by customer location are as
follows:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
United States $1,576,000 $1,615,000
Europe, primarily United Kingdom 87,000 690,000
Other International 4,000 80,000
---------- ----------
$1,667,000 $2,385,000
========== ==========
</TABLE>
NOTE 9 - LITIGATION
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company. The settlement provides for the dismissal
and release of all claims in these cases in exchange for (a) payment of
$2,500,000 by the Company's insurance carrier to the class of plaintiffs, (b)
issuance by the Company of 2,304,271 shares of its common stock to the
plaintiffs, which is equal to twenty percent of the sum of (i) the number of
shares of common stock currently outstanding and (ii) the maximum number of
shares issuable upon conversion of the Series E Preferred Stock, and (c)
cooperation by the Company with plaintiffs' counsel by providing certain
documents and information regarding the claims asserted in the class actions.
The Company recorded expense of $1,128,000 in connection with this settlement in
1998 based on the average closing market price the week preceding the execution
of the memorandum of understanding for the settlement times the number of shares
of the Company's common stock to be issued in the settlement.
In addition, as a part of the settlement in these class actions, the
Company's former Chairman of the Board, President, and Chief Executive Officer,
Jay V. Tanna, has agreed to forego any claim for unpaid compensation of $131,000
under the Separation Agreement and Release of Claims that Mr. Tanna and the
Company entered into on April 1, 1998, and to surrender his 35,000 shares of
common stock in the Company. Mr. Tanna and the Company also have entered into a
Settlement Agreement and Mutual Release resolving all claims and disputes with
one another, with the exception of certain existing indemnification obligations
under Altris' bylaws, California law, and the indemnity agreement between the
Company and Mr. Tanna related to his services as a director and officer of the
Company.
In addition to the securities actions described above, the
Company is involved from time to time in litigation arising in the normal course
of business. Management believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
NOTE 10 - SUBSEQUENT EVENT
On April 14, 2000, a special meeting of shareholders was held at the
Company's headquarters. At this meeting, the shareholders approved a proposal to
amend the Company's Article's of Incorporation to increase the number of
authorized shares of common stock from 30,000,000 to 40,000,000 shares. The
shareholders also approved a proposed Stock Purchase agreement with Spescom for
the conversion of the subordinated debt of $3,000,000 and preferred stock of
$3,000,000, along with accrued interest and dividends, into 9,528,096 shares of
common stock and the issuance of 5,258,714 shares for $3,700,000. On April 21,
2000, the Stock Purchase agreement transaction was completed. As part of the
transaction the short term loans totaling $327,000 and revolving loans of
$450,000 were all repaid at this time. In addition, the Company acquired all
rights to Spescom's EMS 2000 software, a configuration management product.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 quarter ended March 31, 2000 were $1,667,000 compared
to $2,385,000 for the quarter ended March 31, 1999.
For the quarter ended March 31, 2000 revenues consisted of $240,000
(14%) in software licenses and $1,427,000 (86%) related to services and other
revenue. This compares to software license revenues of $772,000 (32%) and
services and other revenue of $1,613,000 (68%) for the quarter ended March 31,
2000.
For the quarter ended March 31, 2000, software license revenues
decreased from the comparable period in the prior year by $532,000, while
revenues generated from services decreased by $186,000. This reduction is
attributable in part to excluding ASL operations as of April 1, 1999, from
the consolidated results as a result of the Spescom transaction (see Note 3).
Additionally, management believes that although the Company's Altris EB
product reached general availability in the second half of 1999, the timing
between order received and revenue recognition has been extended from
shipment to when acceptance has occurred since a historical record has not
yet been demonstrated that acceptance is perfunctory. In addition, management
believes new orders have been negatively impacted by customers' uncertainty
regarding the financial condition of the Company. Management also believes
that purchasing patterns of customers and potential customers was affected by
Year 2000 issues, with many companies expending significant resources to
correct their software systems for Year 2000 compliance. Management believes
that these expenditures have reduced funds available to purchase software
products such as those offered by the Company.
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 for the quarter ended March 31, 2000. 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
Cost of license revenues consists of costs associated with reselling
third-party software products and amortization of internal software development
costs. Gross profit as a percentage of license revenues was a loss of 15% for
the quarter ended March 31, 2000 compared to 60% for the quarter ended March 31,
1999. The decrease in the gross profit margin from licenses was due principally
to revenues decreasing while amortization of software development costs remained
fixed.
Cost of services and other revenues consists primarily of
personnel-related costs in providing consulting services, training to customers
and support. It also includes costs associated with reselling third-party
hardware,
10
<PAGE>
services and maintenance. Gross profit as a percentage of services and
other revenue was 48%, for the quarter ended March 31, 2000 compared to 34% for
the quarter ended March 31, 1999. The increase in gross profit as a percentage
of services and other revenues for the comparable period is due to the Company
reducing personnel related costs associated with services. Additionally,
commencing as of April 1, 1999, cost of services has not included ASL's cost of
services.
The Company's software and services are sold at a significantly higher
margin than third party products and services 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.
Operating Expenses
Research and development expense for the quarter ended March 31, 2000
was $415,000, as compared to $1,011,000 for the same period in the prior year.
The decrease in research and development for the quarter ended March 31, 2000
was primarily attributed to the exclusion of ASL research and development
expenses as of April 1, 1999. In addition, the Company has reduced the
expenditures associated with outside development groups.
Marketing and sales expense for the quater ended March 31, 2000 was
$316,000 as compared to $765,000 for the same period in the prior year. The
decrease is primarily due to lower personnel and associated costs. In addition,
as a result of the delay in releasing Altris EB, the Company reduced marketing
and promotional costs. Commencing April 1, 1999, marketing and sales expense has
not included ASL's expenses.
General and administrative expense was $341,000 for the quarter ended
March 31, 2000 as compared to $1,447,000 for the same period in the prior year.
The decrease in the general and administrative expense in the first quarter is
due primarily to excluding ASL general and administrative expense since April 1,
1999. The exclusion of ASL also reduced the amount of goodwill amortization by
$660,000 for the quarter ended March 31, 2000 compared to the same period in the
prior year. In addition, with the settlement of the securities class action
lawsuits against the Company, legal fees have been reduced.
Interest and other income was $1,000 for the quarter ended March 31,
2000 as compared to $9,000 for the same period a year ago. The decrease in the
quarter total is primarily due to lower cash balances in 2000 versus 1999.
Interest and other expense was $147,000 for the quarter ended March 31,
2000 versus $163,000 for the same period in the prior year. The decrease was due
to a lower debt balance in 2000 versus the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's cash and cash equivalents totaled
$213,000 as compared to $142,000 at December 31, 1999, and its current ratio was
.09 to 1. The Company has one revolving credit facilities. At March 31, 2000,
$450,000 was outstanding on the revolving loan agreements with no additional
funds available under the facilities.
For the period ended March 31, 2000, cash used in operating activities
and investing activities totaled $128,000 and $9,000 respectively, while cash
provided by financing activities totaled $208,000. Cash provided by financing
activities was from net borrowings from Spescom.
In 1999 and the first quarter of 2000, the Company experienced a
reduction in incoming orders. The Company's ability to continue operations is
dependent upon the generation of new system sales of Altris eB(TM) in the
near term, which cannot be assured, along with raising additional cash
through a debt or equity offering. To address these financial concerns in
April 2000 the Company completed a tranasaction with Spescom whereby the
subordinated debt of $3,000,000 and preferred stock of $3,000,000 owned by
Spescom, along with accrued
11
<PAGE>
interest and dividends was converted into 9,528,096 shares of common stock. In
addition, Spescom purchased 5,258,714 shares of common stock for $3,700,000 in
cash. (See Note 10 to the Consolidated Finacial Statements). Management believes
that such additional cash infusion is adequate to meet its short-term needs for
working capital.
Net Operating Loss Tax Carryforwards
As of December 31, 1999, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $52,717,000
and $8,294,000, respectively which expires over the years 2000 through 2019. In
addition, the Company generated but has not used research and investment tax
credits for federal income tax purposes of approximately $1,150,000, which will
substantially expire in the years 2000 through 2005. Under the Internal Revenue
Code of 1986, as amended (the "Code"), the Company generally would be entitled
to reduce its future Federal income tax liabilities by carrying unused NOL
forward for a period of 15 to 20 years to offset future taxable income earned,
and by carrying unused tax credits forward for a period of 15 years to offset
future income taxes.
The Company's ability to utilize any NOL and credit carryforwards in
future years may be restricted in the event the Company undergoes an "ownership
change," generally defined as a more than 50 percentage point change of
ownership by one or more statutorily defined "5-percent stockholders" of a
corporation, as a result of future issuances or transfers of equity securities
of the Company within a three-year testing period. In the event of an ownership
change, the amount of NOL attributable to the period prior to the ownership
change that may be used to offset taxable income in any year thereafter
generally may not exceed the fair market value of the Company immediately before
the ownership change (subject to certain adjustments) multiplied by the
applicable long-term, tax-exempt rate announced by the Internal Revenue Service
in effect for the date of the ownership change. A further limitation would apply
to restrict the amount of credit carryforwards that might be used in any year
after the ownership change. As a result of these limitations, in the event of an
ownership change, the Company's ability to use its NOL and credit carryforwards
in future years may be delayed and, to the extent the carryforward amounts
cannot be fully utilized under these limitations within the carryforward
periods, these carryforwards will be lost. Accordingly, the Company may be
required to pay more Federal income taxes or to pay such taxes sooner than if
the use of its NOL and credit carryforwards were not restricted.
In April 2000, the Company completed a share issuance to Spescom
whereby Spescom owns approximately 66% of the voting control of the Company.
Since Spescom has now acquired its entire majority interest in the Company
within one year, this would constitute an "ownership change" under the Code.
Thus, the Company's ability to use its NOL and credit carryforwards in future
years will be delayed and, to the extent the carryforward amounts could not be
fully utilized under the limitations discussed above within the carryforward
periods, these carryforwards would be lost. Accordingly, if the Company
generates net income in future years, the Company will be required to pay more
Federal income taxes or to pay such taxes sooner than if the use of its NOL and
credit carryforwards were not restricted.
In connection with the acquisition of Optigraphics, the Company
acquired Optigraphics' net operating losses which are limited to offset against
that entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Customer Concern Regarding the Company's Financial Position
As a result of misapplications in its revenue recognition policies, the
Company in 1998 restated its previously presented interim financial information
and annual financial statements for 1996 and the interim information for the
first three quarters of 1997. In addition, the report of the Company's
independent accountants, Grant Thornton LLP, on the Company's Consolidated
Financial Statements as of and for the year ended December 31, 1999 includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern. See "Report of Independent Certified Public Accountants" accompanying
the Consolidated
12
<PAGE>
Financial Statements. The Company's restatement of its financial statements,
de-listing of the Company's Common Stock from the Nasdaq National Market as a
result of the Company's failure to meet certain listing requirements, corporate
actions to restructure operations and reduce operating expenses, and customer
uncertainty regarding the Company's financial condition has had, and are likely
to have in the future, a material adverse effect on the Company and its ability
to sell its products in future.
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. For the quarter ended March 31,
2000, revenue from the United States, Europe and other locations in the world
were 95%, 4% and 1%, respectively. This compares to 68%, 29% and 3%,
respectively, for the same period in 1999. The increase in revenue from the
United States is due to the sale of ASL. The revenue from Europe is now taken
through royalties (see Note 3). 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. Changes in foreign currency rates, the
condition of local economies, and the general volatility of software markets may
result in a higher or lower proportion of foreign revenues in the future.
Although the Company's operating and pricing strategies take into account
changes in exchange rates over time, there can be no assurance that future
fluctuations in the value of foreign currencies will not have a material adverse
effect on the Company's business, operating results and financial condition.
Inflation
The Company believes that inflation has not had a material effect on
its operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
Year 2000 Compliance
Many currently installed computer systems and software products were
coded to accept only two digit entries in the date code field; however, these
date code fields need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' computer systems
and/or software were required to be upgraded or replaced to comply with such
"Year 2000" requirements.
The Company has completed a program, to review the Year 2000 compliance
status of the software and systems used in its internal business processes, to
obtain appropriate assurances of compliance from the manufacturers of these
products and agreement to modify or replace all non-compliant products. The
Company did address all issues identified prior to Year 2000 and did not
encounter any material difficulties.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company has tested all of its legacy products and
believes that its software products are generally Year 2000 compliant, meaning
that the use or occurrence of dates on or after January 1, 2000 will not
materially affect the performance of the Company's software products with
respect to four digit date dependent data or the ability of such products to
correctly create, store, process and output information related to such date
data. The Company did not encounter any significant Year 2000 problems for the
change from 1999 to 2000.. However, there can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with date functions. To the extent the Company's software products
are not fully Year 2000 compliant, there can be no assurance that the Company's
software products contain all necessary software routines and codes necessary
for the accurate calculation, display, storage and manipulation of data
involving dates. In addition, in certain circumstances, the Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against
13
<PAGE>
the Company. In addition, some commentators have stated that a significant
amount of litigation will arise out of Year 2000 compliance issues, and the
Company is aware of lawsuits against other software vendors. Because of the
unprecedented nature of such litigation, it is uncertain to what extent the
Company may be affected by it.
In addition, management believes that future purchasing patterns of
customers and potential customers have been affected by Year 2000 issues, with
many companies expending significant resources to correct their software systems
for Year 2000 compliance. These expenditures have reduced funds available to
purchase software products such as those offered by the Company.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company and dismissed the lawsuits with prejudice.
The settlement provides for the dismissal and release of all claims in these
cases in exchange for (a) payment of $2,500,000 by the Company's insurance
carrier to the class of plaintiffs, (b) issuance by the Company of 2,304,271
shares of its common stock to the plaintiffs, which is equal to twenty percent
of the sum of (i) the number of shares of common stock currently outstanding and
(ii) the maximum number of shares issuable upon conversion of the Series E
Preferred Stock, and (c) cooperation by the Company with plaintiffs' counsel by
providing certain documents and information regarding the claims asserted in the
class actions. The Company recorded expense of $1,128,000 in connection with
this settlement in 1998 based on the average closing market price the week
preceding the execution of the memorandum of understanding for the settlement
times the number of shares of the Company's common stock to be issued in the
settlement.
In addition, as a part of the settlement in these class actions, the
Company's former Chairman of the Board, President, and Chief Executive Officer,
Jay V. Tanna, has agreed to forego any claim for unpaid compensation of $131,000
under the Separation Agreement and Release of Claims that Mr. Tanna and the
Company entered into on April 1, 1998, and to surrender his 35,000 shares of
common stock in the Company. Mr. Tanna and the Company also have entered into a
Settlement Agreement and Mutual Release resolving all claims and disputes with
one another, with the exception of certain existing indemnification obligations
under Altris' bylaws, California law, and the indemnity agreement between the
Company and Mr. Tanna related to his services as a director and officer of the
Company.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 5 - SUBSEQUENT EVENT:
On April 14, 2000, a special meeting of shareholders was held at the
Company's headquarters. At this meeting, the shareholders approved a proposal to
amend the Company's Article's of Incorporation to increase the number of
authorized shares of common stock from 30,000,000 to 40,000,000 shares. The
shareholders also approved a proposed Stock Purchase agreement with Spescom for
the conversion of the subordinated debt of $3,000,000 and preferred stock of
$3,000,000, along with accrued interest and dividends, into 9,528,096 shares of
common stock and the issuance of 5,258,714 shares for $3,700,000. On April 21,
2000, the Stock Purchase agreement transaction was completed. As part of the
transaction the short term loans totaling $327,000 and revolving loans of
$450,000 were all repaid at this time. In addition, the Company acquired all
rights to Spescom's EMS 2000 software, a configuration management product.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) None
14
<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: May 15, 2000
------------------------
15
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10Q FOR THE YEAR TO DATE MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SALES> 1,667
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<CGS> 1,014
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<LOSS-PROVISION> 0
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