<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
----------------------------------------
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, For Use of
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ALTRIS SOFTWARE, INC.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT , IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee:
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
ALTRIS SOFTWARE, INC.
9339 CARROLL PARK DRIVE
SAN DIEGO, CALIFORNIA 92121
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 14, 2000
A Special Meeting of Shareholders (the "SPECIAL MEETING") of Altris
Software, Inc., a California corporation (the "COMPANY"), will be held at the
Company's headquarters at 9339 Carroll Park Drive, San Diego, California, at
9:00 a.m. on Friday, April 14, 2000, for the following purposes:
1. To approve the Stock Purchase Agreement, dated as of January
14, 2000, between the Company and Spescom Limited ("SPESCOM"),
which is attached as ANNEX A to the proxy statement, and the
transactions contemplated thereby, including the sale of a
controlling interest in the Company to Spescom.
2. To vote upon a proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares of
Common Stock from 30,000,000 to 40,000,000.
The Board of Directors has fixed the close of business on February 22,
2000 as the record date for the determination of shareholders entitled to
receive notice of, and to vote at, the Special Meeting and any adjournments or
postponements thereof, and only holders of record of the Company's Common Stock
and the Series E Convertible Preferred Stock at the close of business on that
date will be entitled to receive notice of, and to vote at, the Special Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
THIS WILL ENSURE THAT YOUR SHARES ARE VOTED IN ACCORDANCE WITH YOUR WISHES AND
THAT A QUORUM WILL BE PRESENT. YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING,
AND YOU MAY VOTE IN PERSON EVEN THOUGH YOU HAVE RETURNED YOUR PROXY.
By Order of the Board of Directors,
John W. Low
Secretary
February __, 2000
<PAGE>
ALTRIS SOFTWARE, INC.
9339 CARROLL PARK DRIVE
SAN DIEGO, CALIFORNIA 92121
---------------------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
APRIL 14, 2000
---------------------------------
INTRODUCTION
This proxy statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Altris Software, Inc. (the "COMPANY")
for use at a Special Meeting of Shareholders (the "SPECIAL MEETING") to be held
at the Company's headquarters at 9339 Carroll Park Drive, San Diego, California,
on April 14, 2000 at 9:00 a.m., or at any adjournments or postponements thereof,
for the purposes set forth herein and in the foregoing Notice. This proxy
statement and the accompanying proxy were first sent to shareholders on or about
February __, 2000.
PROXY INFORMATION
Shares represented by properly executed proxies, if received in time
and not revoked or suspended, will be voted in accordance with the instructions
indicated thereon or, if no instructions are given for any or all of the
proposals, will be voted as recommended by the Board of Directors.
A shareholder giving a proxy has the power to revoke it at any time
before it is exercised by attending and voting at the Special Meeting or by
filing with the Secretary of the Company either a written notice of revocation
or a duly executed proxy bearing a later date.
RECORD DATE AND VOTING
Each shareholder of record of the Common Stock and the Series E
Convertible Preferred Stock of the Company (the "SERIES E PREFERRED STOCK") at
the close of business on February 22, 2000 is entitled to vote on all matters
submitted to a vote of the shareholders at the Special Meeting. At the close of
business on January 24, 2000, there were 13,101,734 shares of Common Stock
outstanding and held of record by approximately 300 shareholders, and 3,000
shares of Series E Preferred Stock outstanding and held of record by one holder,
Spescom Limited ("SPESCOM"). Holders of Common Stock and Series E Preferred
Stock will vote as a single class with one vote for each share on all matters
submitted to the shareholders at the Special Meeting. The presence, in person or
by proxy, of the holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum.
The affirmative vote of a majority of the outstanding shares of Common
Stock and Series E Preferred Stock entitled to vote at the Special Meeting,
voting together as a class, will be required for approval of the proposal to
increase the number of authorized shares of Common Stock from 30,000,000
1
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to 40,000,000. The affirmative vote of a majority of the shares of Common Stock
and Series E Preferred Stock represented at the meeting, voting together as a
class, will be required for approval of the proposal to approve the Stock
Purchase Agreement and the transactions contemplated thereby.
In general, abstentions will have no effect on the outcome of the
voting with respect to any matter. However, abstentions will have an effect on
the proposal to increase the number of authorized shares of Common Stock, as the
affirmative vote of a majority of the outstanding shares of Common Stock and
Series E Preferred Stock entitled to vote at the Special Meeting, voting
together as a class, is required for approval.
As to certain matters other than the election of directors, New York
Stock Exchange and American Stock Exchange rules generally require when shares
are registered in street or nominee name that their member brokers receive
specific instructions from the beneficial owners in order to vote on such a
proposal. If a member broker indicates on the proxy that such broker does not
have discretionary authority as to certain shares to vote on a particular
matter, those shares will not be considered as present and entitled to vote with
respect to that matter.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information as to shares of the Common
Stock beneficially owned as of December 17, 1999, on both an actual and a pro
forma basis giving effect to the consummation of the transactions contemplated
by the Stock Purchase Agreement, by:
- each of the five current directors and the two Spescom affiliates
who would be appointed to the Board of Directors upon consummation
of the transactions to replace Messrs. McGovern and Atkinson upon
their resignation from the Board, as discussed below,
- the Company's Chief Executive Officer and each of its other
executive officers,
- all directors and executive officers as a group and
- each person who, to the extent known to the Company, beneficially
owns more than 5% of the outstanding shares of Common Stock.
Unless otherwise indicated in the footnotes following the table, the
persons as to whom the information is given have sole voting and investment
power over the shares shown as beneficially owned, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------------------------- --------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES (1) CLASS (1) SHARES (1) CLASS (1)
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Roger H. Erickson........................ 132,250 1.0% 132,250 *
John W. Low.............................. 117,750 * 117,750 *
D. Ross Hamilton......................... 186,500 1.4% 186,500 *
Michael J. McGovern...................... 353,251 2.7% 353,251 1.3%
Larry D. Unruh........................... 11,797 * 11,797 *
Martin P. Atkinson....................... 7,500 * 7,500 *
Hilton Isaacman(2)....................... 5,529,952(3) 40.0% 18,542,381 65.7%
Johan Leitner(2)......................... 5,529,952(3) 40.0% 18,542,381 65.7%
Spescom Limited.......................... 5,529,952(3) 40.0% 18,542,381 65.7%
All directors and executive officers
as a group (8 persons)................ 888,673 6.7% 888,673 3.2%
</TABLE>
- ----------
* Less than one percent.
(1) Amounts and percentages include shares of Common Stock that may be acquired
within 60 days of December 17, 1999 through the exercise of stock options
as follows: 71,250 shares for Mr. Erickson, 70,750 shares for Mr. Low,
15,000 shares for Mr. Hamilton, 7,500 shares for Mr. McGovern, 7,500 shares
for Mr. Unruh, 7,500 shares for Mr. Atkinson and 228,125 shares for all
directors and executive officers as a group.
(2) As affiliates of Spescom, Messrs. Isaacman and Leitner could be deemed
beneficial owners of the shares of Common Stock owned by Spescom Limited.
However, Messrs. Isaacman and Leitner disclaim beneficial ownership of all
such shares.
(3) Amount includes (i) 1,801,381 shares of Common Stock issuable upon
conversion of Series E Convertible Preferred Stock having a conversion
price of $1.90 per share and (ii) 300,000 shares of Common Stock issuable
upon exercise of a warrant having an exercise price of $1.90 per share.
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ITEM 1
THE STOCK PURCHASE AGREEMENT AND THE
PROPOSED TRANSACTIONS WITH SPESCOM
This section of the proxy statement describes the principal aspects of
the proposed transactions with Spescom as set forth in the Stock Purchase
Agreement attached as ANNEX A to this proxy statement, and also sets forth
general information regarding Spescom and its business. You should read the
Stock Purchase Agreement completely and carefully as it is the legal document
that governs the proposed transactions with Spescom. In addition, you are urged
to review carefully the financial statements of the Company and Spescom included
and incorporated by reference herein and the other documents attached as annexes
to this proxy statement.
BACKGROUND OF THE TRANSACTIONS
Despite making progress with its new products, including eB, the
Company's management has been evaluating possible sources of financing to
address certain challenges. These challenges include those posed by:
- insufficient cash to continue operations in the long term or to
grow the Company's business in its traditional markets as well as
new markets,
- a weak balance sheet that adversely affects the Company's ability
to attract new customers, and
- debt that reduces future earnings through interest expense.
In May 1999, the Company and Spescom concluded certain transactions
which included Spescom's initial investment in the Company. The transactions
involving Spescom's investment in the Company in May 1999 are referred to in
this proxy statement as the "MAY 1999 TRANSACTIONS". In early September 1999,
Hilton Isaacman, Spescom's Director of Corporate Finance, telephoned Roger
Erickson, the Company's Chief Executive Officer, to inform Mr. Erickson that
Spescom was interested in exploring the possibility of making a larger, more
substantial investment in the Company.
On September 18, 1999, Mr. Isaacman advised Mr. Erickson of Spescom's
concerns regarding the business and operations of Altris Software Limited
("ALTRIS U.K."), a United Kingdom corporation owned 60% by Spescom and 40% by
the Company. Spescom acquired its 60% interest in Altris U.K. from the Company
as part of the May 1999 Transactions. Mr. Isaacman also outlined a preliminary
proposal for Spescom to acquire a controlling interest in the Company and
offered to provide a loan to the Company of $500,000 in order to address the
Company's need for additional capital at that time. As proposed, the loan would
be convertible into the Company's Common Stock, at Spescom's option, or
otherwise be due and payable on February 28, 2000. In exchange for the loan, the
Company would be required to agree not to pursue a similar transaction with any
other third party and to agree in principle to Spescom's proposal to acquire a
controlling interest in the Company.
On September 21, 1999, Mr. Erickson responded to Mr. Isaacman's
proposal. Mr. Erickson agreed not to seek funding from a third party and to
negotiate in good faith with Spescom toward Spescom acquiring a controlling
interest in the Company, subject to certain modifications in Mr. Isaacman's
proposal. Such modifications included that the $500,000 loan would be
convertible at $0.35 per share and that the Company would agree to negotiate in
good faith but not to accept the principal terms of Mr. Isaacman's September 18,
1999 proposal. Mr. Erickson also pledged to present the proposed terms of the
$500,000 convertible loan to the Company's Board of Directors for its approval.
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On September 21, 1999, the Company's Board of Directors unanimously
adopted resolutions approving the principal terms of the $500,000 convertible
loan from Spescom and authorizing the Company's management to negotiate in good
faith with Spescom to sell Spescom a controlling interest of 60% or more in the
Company, when aggregated with its current holdings.
On October 5, 1999, at a meeting of the Board of Directors of the
Company, the Board was advised that representatives from Spescom would be
arriving the following week to begin negotiating the terms of Spescom's proposed
acquisition of a controlling interest in the Company. The Board was also advised
that Spescom wanted the Company to explore methods of retiring the Company's
obligations under the terms of its outstanding preferred stock and debt
securities in order to improve the Company's balance sheet. The Board of
Directors also created a Special Committee (the "SPECIAL COMMITTEE") to
negotiate with Spescom, consisting of Roger Erickson, Larry Unruh and D. Ross
Hamilton.
In a letter dated October 27, 1999, in response to a revised offer made
on behalf of Spescom by Mr. Isaacman while Mr. Isaacman was in San Diego the
previous week, Mr. Erickson, on behalf of the Special Committee, gave Mr.
Isaacman the Special Committee's counter-offer, which included the following key
terms:
- Spescom would purchase from Finova Mezzanine Capital, Inc. the
Company's 11.5% Subordinated Debenture in the principal amount of
$3,000,000 issued on June 27, 1997 (the "DEBENTURE") and 3,000
shares of Series E Convertible Preferred Stock of the Company,
stated value $1,000 per share (the "PREFERRED STOCK," and
collectively with the Debenture and certain other securities and
agreements, including a warrant agreement to purchase 300,000
shares of Common Stock at $1.90 per share, the "FINOVA
INSTRUMENTS").
- Once Spescom acquired the Finova Instruments from Finova, the
Company would issue Common Stock at a valuation of $0.75 per
share in exchange for the delivery by Spescom of the Preferred
Stock and the Debenture to the Company and the subsequent
cancellation of the Finova Instruments.
- Spescom would invest $3,500,000 in cash in the Company in
exchange for newly-issued shares of Common Stock at a valuation
of $0.75 per share.
On October 28, 1999, the Board of Directors of the Company met to
receive an update from Company management on the status of the negotiations with
Spescom. The Board also discussed how the proposed transactions should be
structured and how to value Spescom's EMS technology, which the Company would
acquire as part of the proposed transactions.
During the following week, Messrs. Isaacman and Erickson continued to
discuss certain terms of the proposed transaction, including the per share
valuation of the Company's Common Stock, the composition of the Company's Board
of Directors, the use by the Company of the newly invested funds, and the
transfer of the Company's remaining interest in Altris U.K. in consideration for
Spescom's release of $200,000 held in escrow pursuant to the May 1999
Transactions.
On November 5, 1999, the Board of Directors of the Company held a
meeting to review Spescom's then-outstanding proposal. After discussing the
terms of the proposal and reviewing a draft Memorandum of Understanding between
the Company and Spescom outlining those terms, the Board of Directors
unanimously approved the principal terms of the proposed transactions and the
Memorandum of Understanding. Messrs. Atkinson and McGovern volunteered to resign
as directors of the Company effective as of the closing of the proposed
transactions to facilitate changes in the composition of the Company's Board of
Directors required by the Spescom draft Memorandum of Understanding. The
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Board of Directors also passed a resolution to waive accrued director's fees and
to accelerate the vesting of stock options held by directors, each contingent
upon the closing of the proposed transactions.
In a letter dated November 8, 1999, Mr. Erickson informed Mr.
Isaacman that the Board of Directors of the Company had authorized the
officers to negotiate an agreement with Spescom containing the principal
terms of the transactions proposed by Spescom, including the valuation of
$0.70 per share for the shares of Common Stock to be issued to Spescom.
Between November 8, 1999 and January 14, 2000, the Company and Spescom,
each with its counsel, negotiated the final terms of the Stock Purchase
Agreement and related documents.
On November 30, 1999, the Board of Directors of the Company met to
discuss an unsolicited offer from a third party to acquire a controlling
interest in the Company. Mr. Erickson addressed the Board of Directors and
informed them of the principal terms of the third party offer and the nature of
the third party's business. The Board of Directors then suspended negotiations
with Spescom pending the Board's consideration of the third party proposal.
On December 7, 1999, the Board of Directors of the Company met to
discuss further the third party offer and ultimately rejected that offer as
inadequate. For further discussion of the Board's reasons for rejecting the
third party offer, please see "Rejection of Alternative Proposal" below. The
Board then received a status update on the negotiation of definitive agreements
relating to the proposed transactions with Spescom.
By an Action by Unanimous Written Consent of the Board of Directors of
the Company dated January 7, 2000, the Board of Directors of the Company adopted
resolutions approving proposed drafts of the definitive documents in connection
with the proposed transactions and authorized the Company's management to
execute and distribute such definitive documents.
THE COMPANY'S REASONS FOR THE TRANSACTIONS
Management firmly believes that the transactions with Spescom are in
the best interests of the Company and its shareholders. Upon consummation of the
Spescom transactions, the Company would realize the following substantial
benefits:
- the Company would obtain much-needed working capital from the
injection of a net amount of approximately $3.6 million in cash
from Spescom on the closing date, which is critical for purposes
of facilitating the Company's growth initiatives, particularly
the Company's initiative regarding its document service provider
business,
- by retiring the Debenture and the Preferred Stock in exchange for
the issuance of Common Stock, the Company would significantly
strengthen its balance sheet, particularly when combined with the
infusion of working capital described above, and
- an expanded strategic relationship with Spescom; at closing, the
Company would acquire the EMS 2000 technology from Spescom, which
could be integrated with the Company's eB product.
Management firmly believes that the benefits described above outweigh
the potentially adverse effects of the transaction, namely (1) selling a
controlling interest in Altris to Spescom, (2) share dilution that may result
from the transaction and (3) impairment of the Company's ability to use net
operating loss carryforwards and research tax credits to offset federal and
state income, as discussed immediately below.
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POSSIBLE RESTRICTION ON THE COMPANY'S ABILITY TO UTILIZE ITS NET OPERATING LOSS
TAX CARRYFORWARDS AS A RESULT OF THE PROPOSED TRANSACTIONS WITH SPESCOM
As of December 31, 1998, the Company had net operating loss
carryforwards ("NOL") for federal income tax purposes of $42,000,000 and for
state income tax purposes of $9,429,000, which expire over the years 1999
through 2018. In addition, the Company generated but has not used research and
investment tax credits for federal income tax purposes of approximately
$500,000, which will substantially expire in the years 2000 through 2005. Under
the Internal Revenue Code of 1986, as amended (the "CODE"), the Company
generally would be entitled to reduce its future federal income tax liabilities
by carrying unused NOL forward for a period of 15 years to offset future taxable
income earned, and by carrying unused tax credits forward for a period of 15
years to offset future income taxes. However, the Company's ability to utilize
any NOL and credit carryforwards in future years may be restricted in the event
the Company undergoes an "ownership change," generally defined as a more than 50
percentage point change of ownership by one or more statutorily defined
"5-percent stockholders" of a corporation, as a result of future issuances or
transfers of equity securities of the Company within a three-year testing
period. In the event of an ownership change, the amount of NOL attributable to
the period prior to the ownership change that may be used to offset taxable
income in any year thereafter generally may not exceed the fair market value of
the Company immediately before the ownership change (subject to certain
adjustments) multiplied by the applicable long-term, tax-exempt rate announced
by the Internal Revenue Service in effect for the date of the ownership change.
A further limitation would apply to restrict the amount of credit carryforwards
that might be used in any year after the ownership change. As a result of these
limitations, in the event of an ownership change, the Company's ability to use
its NOL and credit carryforwards in future years may be delayed and, to the
extent the carryforward amounts cannot be fully utilized under these limitations
within the carryforward periods, these carryforwards will be lost. Accordingly,
after any ownership change, if the Company were successful in the future in
generating net income, 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.
If the proposed transactions with Spescom are consummated, Spescom
would own approximately 66% of the voting control of the Company and, because
Spescom would have acquired its entire majority interest in the Company within
one year, this would constitute an "ownership change" under the Code. Thus, the
Company's ability to use its NOL and credit carryforwards in future years would
be delayed and, to the extent the carryforward amounts could not be fully
utilized under the limitations discussed above within the carryforward periods,
these carryforwards would be lost. Accordingly, if the Company generated net
income in future years the Company would be required to pay more Federal income
taxes or to pay such taxes sooner than if the use of its NOL and credit
carryforwards were not restricted.
Despite these adverse tax consequences, the Company's management
believes that the financial advantages of the proposed transactions with Spescom
outweigh such adverse tax consequences for the reasons discussed above in
"Background of the Transactions" and "The Company's Reasons for the
Transactions."
REJECTION OF ALTERNATIVE PROPOSAL
During the pendency of the negotiations with Spescom, the Company's
Board of Directors received an unsolicited proposal (the "ALTERNATIVE PROPOSAL")
from a third party (the "THIRD PARTY") to acquire substantially all of the
assets of the Company. After consulting its advisors and considering the merits
of the Alternative Proposal, the Board of Directors determined that it was in
the best interests of the Company and its shareholders to reject the Alternative
Proposal and continue negotiating toward a definitive agreement with Spescom.
7
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The Board of Directors deemed the Alternative Proposal to be less
advantageous to the Company and its shareholders than the proposed Spescom
transaction because of the following factors, which constitute all of the
material factors considered by the Board:
- the Alternative Proposal involved only a purchase of the
Company's assets without assuming the Company's liabilities;
- the consideration offered by the Third Party for the Company's
assets was the common stock of the Third Party, which is a
relatively illiquid security subject to a low volume of trading
on the over-the-counter market. In order to pay the Company's
creditors and obtain cash for working capital, as needed, the
Company would have been required to sell a large quantity of
these shares in a short period of time, which likely would lead
to a progressive decline in the value of such shares and thus
reduce the overall value of the transaction to the Company and
its shareholders;
- the price of the Third Party's common stock has been highly
volatile, and the Alternative Proposal did not contemplate a
sufficiently high premium over the current value of the Company's
common stock to compensate the Company's shareholders for the
risk of this volatility;
- the Alternative Proposal did not, in the judgment of the
Company's Board, appropriately value the Company's next
generation of products and services; and
- the structure of the Alternative Proposal would have meant that
the transactions contemplated thereby would have resulted in a
taxable event for the majority of the Company's shareholders upon
the dissolution of the Company after the sale of its assets under
the Alternative Proposal.
The foregoing discussion of the information and factors considered by
the Board is not intended to be exhaustive, but constitutes all of the material
factors considered by the Board. In reaching its determination that it was in
the best interests of the Company and its shareholders to reject the Alternative
Proposal, the Board did not assign relative or specific weights to the foregoing
factors and individual directors may have weighed such factors differently.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
HOLDERS OF THE COMPANY'S COMMON STOCK VOTE "FOR" APPROVAL OF THE STOCK PURCHASE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
OPINION OF FINANCIAL ADVISOR TO THE BOARD OF DIRECTORS OF THE COMPANY
Pursuant to an engagement letter dated December 15, 1999, the Company
retained Broadmark Capital Corporation ("BROADMARK") to render an opinion as to
the fairness of the methodologies used by the Company in assessing the value of
the proposed transactions with Spescom. In an opinion dated December 20, 1999
(the "OPINION"), Broadmark concluded that the consideration to be received by
the Company in the proposed transactions with Spescom was fair to the Company
and its shareholders from a financial point of view, as of the date of the
Opinion.
The full text of the Opinion, which sets forth the assumptions made,
matters considered and limits on the review undertaken by Broadmark, is attached
as ANNEX B to this proxy statement and is
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incorporated herein by reference. The Company urges you to read the Opinion in
its entirety. The Opinion is addressed to the Board of Directors of the Company,
is rendered to it in connection with its consideration of the proposed
transactions with Spescom and does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote at the Special
Meeting.
In arriving at its opinion, Broadmark reviewed, among other things:
- the terms of the proposed transactions with Spescom;
- publicly available information concerning the Company and its
holdings that it believed to be relevant to its analysis;
- certain publicly available information concerning certain other
companies engaged in businesses generally comparable to the
Company's;
- other studies and economic and market data as it deemed necessary
or appropriate;
- financial and operating information with respect to the business,
operations and prospects of the Company furnished to it by the
Company;
- a trading history of the Company's Common Stock since July 20,
1998;
- a comparison of certain of the Company's trading multiples with
those of other companies that it deemed relevant; and
- a comparison of the trading price of the Company's Common Stock
at various dates with the purchase premium or discount of certain
other transactions that it deemed relevant.
In addition, Broadmark held discussions with certain members of the
Company's management with respect to the effect of the proposed transactions
with Spescom on the operations and future investment strategy of the Company.
Broadmark relied upon and assumed, without independent verification,
the accuracy and completeness of all information that was publicly available or
that the Company furnished to it, and Broadmark did not assume any
responsibility or liability therefor. Except for the valuation comparisons
specifically described below, Broadmark did not conduct any valuation or
appraisal of any assets or liabilities, nor have any valuations or appraisals
been provided to Broadmark. In relying on financial analyses and forecasts
provided to Broadmark, Broadmark assumed that they have been reasonably prepared
based on assumptions reflecting the best currently available estimates and
judgments by management as to the Company's expected future results of
operations and its financial condition to which such analyses or forecasts
relate. In arriving at its opinion, Broadmark did not conduct a physical
inspection of the properties and facilities of the Company's holdings, did not
make or obtain any evaluations or appraisals of the assets or liabilities of
such holdings and expressed no opinion regarding the liquidation value of the
Company.
The projections for the Company furnished to Broadmark were prepared by
the Company's management. The Company does not publicly disclose internal
management projections of the type provided to Broadmark in connection with
Broadmark's analysis of the Spescom investment in the Company, and such
projections were not prepared with a view toward public disclosure. These
projections were based on numerous variables and assumptions that are inherently
uncertain and may be beyond management's control, including, without limitation,
factors related to general economic and competitive conditions and prevailing
interest rates. Accordingly, actual results could vary significantly from those
set forth in such projections.
9
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Broadmark's opinion was based on economic, market and other conditions
as in effect on, and the information made available to Broadmark as of, the date
of the Opinion. Subsequent developments with respect to the Company, the
financial markets generally or otherwise may affect such economic, market and
other conditions, and Broadmark does not have any obligation to update, revise
or reaffirm its Opinion. Broadmark expressed no opinion with respect to the
price at which the Company's Common Stock will trade at any future time.
The Company's management advised Broadmark that it did not believe that
there were any other alternative transactions or courses of action, other than
Spescom's proposed investment, practically available to the Company that would
effectively address the Company's liquidity and capital concerns.
The summary set forth above does not purport to be a complete
description of the analyses or data presented by Broadmark. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Broadmark believes that the summary set
forth above and its analyses must be considered as a whole and that selecting
portions thereof, without considering all of its analyses, could create an
incomplete view of the processes underlying its analyses and the Opinion.
Broadmark based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and
industry-specific factors. The
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other principal assumptions upon which Broadmark based its analyses are set
forth above under the description of each such analysis. Broadmark's analyses
are not necessarily indicative of actual values or actual future results that
might be achieved, which values may be higher or lower than those indicated.
Moreover, Broadmark's analyses are not and do not purport to be appraisals or
otherwise reflective of the prices at which businesses actually could be bought
or sold.
Broadmark did not recommend to the Company the consideration to be paid
by Spescom in the proposed transactions. No restrictions or limitations were
imposed by the Company upon Broadmark with respect to the investigations made or
the procedures followed by Broadmark in rendering its opinion.
As a part of its investment banking business, Broadmark and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Broadmark was selected to advise the Board of
Directors of the Company and to deliver a fairness opinion with respect to
Spescom's proposed investment on the basis of such experience and its
familiarity with the Company.
As compensation for its services, the Company has agreed to pay
Broadmark a fee of $5,000 in cash and a warrant to purchase up to 100,000 shares
of the Company's Common Stock at an exercise price equal to the average closing
price for the ten trading days immediately prior to December 15, 1999. In
addition, the Company has agreed to indemnify Broadmark against certain
liabilities.
Broadmark has in the past provided general consulting services to the
Company. In the ordinary course of their businesses, Broadmark and its
affiliates may actively trade the securities of the Company for their own
accounts or for the accounts of customers and, accordingly, they may at any time
hold long or short positions in such securities.
THE STOCK PURCHASE AGREEMENT
Set forth below is a description of the principal provisions of the
Stock Purchase Agreement. You are urged to review carefully the full text of the
Stock Purchase Agreement attached to this proxy statement as ANNEX A.
ISSUANCE OF COMMON STOCK
Promptly after the satisfaction or waiver of the conditions to the
closing of the proposed transactions set forth in the Stock Purchase
Agreement, the Company will issue to Spescom an aggregate of 14,813,810
shares of its Common Stock. This is in addition to the 1,428,571 shares of
Common Stock issued to Spescom after it elected to convert a $500,000 loan
made by Spescom to the Company in September 1999, which, by its terms, was
convertible into the Company's Common Stock at $0.35 per share on or before
January 1, 2000. The other consideration for these shares will be as follows:
- Spescom will pay $3,700,000 in cash, or $0.70 per share, for
5,285,714 shares;
- the Company will issue 9,528,096 shares in exchange for delivery
to the Company of the Debenture and the Preferred Stock, which
Spescom acquired from Finova Mezzanine Capital, Inc. on December
9, 1999. Upon the issuance of the 9,528,096 shares of Common
Stock in this exchange, the Debenture and the Preferred Stock
will be canceled and will no longer constitute obligations of the
Company.
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- the Company will pay Spescom $200,000 in cash for the transfer to
the Company of Spescom's EMS 2000 technology (as described in
Exhibit A to the Stock Purchase Agreement annexed hereto);
- the Company will transfer its 40% ownership interest in Altris
U.K. to Spescom, which presently has a 60% ownership interest in
Altris U.K., and Spescom will release from escrow and return to
the Company $200,000 which had been placed in escrow to satisfy
any obligations of the Company under its representations and
warranties to Spescom relating to the transaction in which
Spescom acquired its 60% interest in Altris U.K.; and
- the Company will use approximately $100,000 of the proceeds it
receives to repay in full a loan made by Spescom to the Company
in November 1999 in the amount of $100,000, plus accrued
interest; however, if shareholder approval of the Stock Purchase
Agreement and the related transactions is not received by March
31, 2000, all amounts owing to Spescom in connection with this
loan may, at Spescom's option, be converted into shares of Common
Stock at a conversion price of $0.70 per share.
As a result of the transactions contemplated by the Stock Purchase
Agreement, Spescom will own approximately 66% of the outstanding Common Stock of
the Company upon consummation of the transactions. Therefore, Spescom will be
able to exercise control over all matters requiring approval by the Company's
shareholders.
COMPOSITION OF THE BOARD; OFFICERS OF THE COMPANY
In connection with the proposed transactions:
- Michael McGovern and Martin Atkinson will resign from the Board
effective upon closing and
- Hilton Isaacman and Johan Leitner, affiliates of Spescom, will be
appointed by the remaining members of the Board (Roger Erickson,
Ross Hamilton and Larry Unruh) to fill the vacancies created by
the resignations of Messrs. McGovern and Atkinson.
Thus, upon consummation of the transactions and giving effect to the
resignations and appointments discussed above, the Company's Board of Directors
would consist of the following persons:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------- ------ -----------------------
<S> <C> <C>
Roger H. Erickson....................... 43 Chief Executive
Officer, Director
D. Ross Hamilton........................ 61 Director
Larry D. Unruh.......................... 48 Director
Hilton Isaacman......................... 46 Director
Johan Leitner........................... 46 Director
</TABLE>
MR. ERICKSON was appointed the Company's Chief Executive Officer in
April 1998, a position which he previously held from October 1991 to August
1993. In addition, Mr. Erickson was appointed as a Director of the Company in
1998, a position which he previously held from July 1990 to June 1995. Mr.
Erickson has served the Company in various other capacities, including as (i)
Vice President, Strategic Partners, from July 1997 to April 1998, (ii) Vice
President, Operations, from June 1996 to July 1997, (iii) Vice President,
Worldwide Channel Sales, from April 1995 to February 1996, (iv) Vice
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President, Alliances and General Manager, PDM Business Unit, from February 1996
to June 1996, (v) Executive Vice President, Marketing and Sales, from September
1993 to March 1995 and (vi) Vice President, Engineering, from June 1990 to
October 1991. From 1984 until March 1990, Mr. Erickson served the Company in
several positions including Senior Systems Engineer and Director of Technical
Projects. Mr. Erickson earned a M.S. degree in Computer Science from the
University of California, Santa Barbara in 1982 and a B.A. degree in Mathematics
from Westmont College in 1978.
MR. HAMILTON has been a Director of the Company since June 1994. He
served as Chairman of the Board of the Company from January 1997 through June
1997. Since 1983 Mr. Hamilton has served as President of Hamilton Research,
Inc., an investment banking firm. Mr. Hamilton received a B.S. degree in
Economics from Auburn University in 1961.
MR. UNRUH has served as a Director of the Company since May 1988. He is
a partner of Hein & Associates LLP, certified public accountants, and has been
its Managing Tax Partner since 1982. Mr. Unruh currently serves as a director of
Basin Exploration, Inc., an oil exploration and development company. Mr. Unruh
received a B.S.B.A. degree in Accounting from the University of Denver in 1973.
MR. ISAACMAN is currently the Director of Corporate Finance of Spescom.
Mr. Isaacman previously served as Spescom's Financial Director from 1990 to
1998. Mr. Isaacman began his career with Spescom in 1988 as Financial Manager
and has been a member of Spescom's Board of Directors since 1990. Mr. Isaacman
received a certificate in accounting, tax and auditing from the University of
Capetown in 1982.
DR. LEITNER has held the position of Director of Strategic Business
Development at Spescom since 1998. Dr. Leitner joined Spescom in 1981 and has
served in various technical and operating capacities within Spescom, including
Group Marketing Director from 1995 to 1997. Since 1987, Dr. Leitner has also
served on the Board of Directors of Spescom. Dr. Leitner earned a BSc in
Engineering in 1975 and a PhD in Electronic Signal Processing in 1979 from the
University of Capetown.
It is currently expected that the officers of the Company immediately
prior to the closing of the transactions contemplated by the Stock Purchase
Agreement will continue to serve as officers of the Company after the closing.
REPRESENTATIONS AND WARRANTIES
THE COMPANY. In Article 4, the Company has given certain customary
representations and warranties, including with regard to:
- the organization and good standing of the Company and its
subsidiaries; (Section 4.1)
- the capitalization of the Company and its subsidiaries; (Section
4.2)
- the Company's authority to enter into the Stock Purchase
Agreement; (Section 4.3)
- the validity and binding effect of the transaction documents;
(Section 4.4)
- material contracts and other commitments; (Section 4.5)
- litigation; (Section 4.6)
- the Company's financial statements; (Section 4.7)
- OTC listing of the Common Stock and filing of SEC reports;
(Section 4.8)
- absence of certain changes since December 31, 1998; (Section 4.9)
- no breaches, defaults or violations of certain documents;
(Section 4.10)
- compliance with applicable laws; (Section 4.11)
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- tax matters; (Section 4.12)
- transactions with affiliates; (Section 4.13)
- title to property; (Section 4.14)
- intellectual property; (Section 4.15)
- environmental matters; (Section 4.16)
- accounting matters; (Section 4.17)
- distributions by subsidiaries to the Company; (Section 4.18)
- prior sales of capital stock; (Section 4.19)
- compliance with regulations; (Section 4.20)
- compliance with margin regulations; (Section 4.21)
- exemption from registration of the offer and sale of shares to
Spescom; (Section 4.22)
- registration obligations; (Section 4.23)
- insurance; (Section 4.24)
- consents and filings required to effect the transactions;
(Section 4.25)
- employee and labor matters; (Section 4.26)
- ERISA matters; (Section 4.27)
- broker's or finder's fees; (Section 4.28)
- accurate disclosure; (Section 4.29) and
- absence of undisclosed liabilities. (Section 4.30)
SPESCOM. In Article 5, Spescom has given certain customary
representations and warranties, including with regard to:
- the organization and good standing of Spescom; (Section 5.1)
- Spescom's authority to enter into the Stock Purchase Agreement;
(Section 5.2)
- the validity and binding effect of the transaction documents;
(Section 5.3)
- Spescom's sale and assignment of the Debenture and the Preferred
Stock are without recourse to, or warranties from, Spescom;
(Section 5.4)
- Spescom's status as an accredited investor and its investment
intent; (Section 5.5)
- consents and filings required to effect the transactions;
(Section 5.6) and
- Spescom having no knowledge of any breach by the Company of its
representations and warranties made in connection with the May
1999 Transactions. (Section 5.7)
CONDUCT OF THE BUSINESS OF THE COMPANY AFTER CLOSING
The Company has agreed to comply with certain covenants after the
closing, including:
- two Spescom nominees will be elected as directors, as discussed
above, and two Spescom nominees will be included in the slate of
nominees that Altris management recommends to shareholders each
year for so long as Spescom or its affiliates hold at least 33%
of the shares to be acquired in the proposed transactions or its
affiliates; (Section 9.1)
- at closing, the $3,700,000 payment for the 5,285,714 shares will
be deposited in a separate Company bank account (the "SEGREGATED
FUNDS"); if a proposed expenditure from the
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Segregated Funds is not contemplated in the budget in the annual
plan adopted by the Board of Directors, any such expenditure:
- in excess of $100,000 will require Board approval, including
unanimous approval of the Spescom board nominees; and
- in excess of $25,000 but less than $100,000 will require the
approval of at least one of Spescom's board nominees;
(Section 9.2)
- prior to the fifth anniversary of the closing, for so long as
Spescom and its affiliates hold at least 15% of the shares to be
acquired in the proposed transactions:
- the Company and its subsidiaries will preserve and keep in
force and effect their corporate existence and good standing
in their respective jurisdictions of organization; (Section
9.3.1)
- the Company and its subsidiaries will maintain, preserve and
keep their properties and assets used in the conduct of
their business in good repair; (Section 9.3.2)
- neither the Company nor any of its subsidiaries will
substantially change the general nature of their business as
it currently exists; (Section 9.3.3)
- the Company and its subsidiaries will maintain customary
insurance coverage; (Section 9.3.4)
- the Company and its subsidiaries will promptly pay all taxes
and assessments imposed upon their properties or businesses,
all trade accounts payable in the ordinary course of
business and all claims for work, labor or materials which
if unpaid might become a lien upon any property of the
Company or its subsidiaries; (Section 9.3.5)
- the Company shall operate its business in compliance with
applicable law and any agreements to which it is a party;
(Section 9.3.6)
- with respect to any plans maintained for the employees of
the Company or its subsidiaries that are subject to ERISA,
the Company will meet minimum funding obligations with
respect to such plans and will promptly notify Spescom of
any reportable events under such plans; (Section 9.3.7)
- the Company will (1) keep its books and records in
accordance with generally accepted accounting principles
consistently applied and (2) permit Spescom representatives
to visit any of the Company's properties, inspect its books
and records and discuss the Company's finances with Company
personnel, during reasonable business hours and as
reasonably requested; (Section 9.3.8)
- the Company will furnish to Spescom:
- copies of the Company's quarterly and annual financial
statements; (Section 9.3.9)
- copies of filings with the SEC and other governmental
reports; (Section 9.3.10) and
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<PAGE>
- internal pipeline reports and such other information as
Spescom may reasonably request; (Section 9.3.11) and
- the Board of Directors of the Company shall adopt an annual
plan within 31 days after the beginning of each fiscal year,
which plan may only be amended or revised in any material
respect with approval of the Board, including both Spescom
nominees. (Section 9.3.12)
OTHER COVENANTS
FURTHER ASSURANCES. The Company and Spescom have each agreed to take
all actions reasonably requested by the other party to effect the transactions
contemplated by the Stock Purchase Agreement. (Section 9.3.13)
CONFIDENTIALITY. Spescom has agreed to keep confidential all
information it receives in connection with the monthly status reports and
internal pipeline reports. (Section 9.3.14)
REGISTRATION RIGHTS. The Company and Spescom will enter into a
Registration Rights Agreement which will provide for certain registration
rights in respect of the shares of the Common Stock to be acquired by Spescom
in the proposed transactions. Spescom will be entitled to the following
rights under and during the term of this agreement, in each case subject to
customary conditions and limitations for exercising registration rights:
- on up to three occasions, Spescom will be entitled to require
the Company to register its shares of Common Stock with the SEC
for sale to the public;
- at any time the Company or another shareholder of the Company
elects to register shares with the SEC, Spescom will be entitled
to include its shares in the offering, subject to various
cut-backs pertaining to the size of the offering and perceived
investor demand for offering; and
- if the Company qualifies to use Form S-3 under the SEC's rules
and regulations for the offering of securities, Spescom will be
entitled to request up to two registrations of its shares on
Form S-3 during any calendar year. (Section 9.3.15)
EMPLOYMENT OF JOSEPH BUCKLEY. Spescom will ensure that Joseph Buckley,
currently a Spescom employee, will become a Company employee on employment terms
similar to those of his present employment. (Section 9.4)
MODIFICATION OF CERTAIN AGREEMENTS. Certain of the obligations of the
Company set forth in the agreements relating to the May 1999 Transactions and
the Finova Instruments will be modified or terminated. (Sections 9.5, 9.6 and
9.7)
TECHNOLOGY TRANSFER AGREEMENT. The Company and Spescom will enter
into a Technology Transfer Agreement which will provided for the Company to
purchase Spescom's EMS 2000 technology for $200,000. In addition, under the
agreement, the Company will agree to grant Spescom a perpetual license to
utilize the EMS 2000 technology in all parts of the world other than North
America, Central America, South America, the Caribbean and Mexico, in exchange
for royalty payments from Spescom based on sales of products related to the
EMS 2000 technology. The license is exclusive until at least December 31,
2000, and after that time its exclusivity may be lost if Spescom does not
meet certain minimum targets for royalties paid to the Company.
INDEMNIFICATION
Each of the Company and Spescom have agreed to indemnify and hold
harmless the other party and its affiliates from any loss, liability, claim,
damage (including incidental and consequential damages), expense (including
costs of investigation and defense and reasonable attorneys' fees) or diminution
in value, whether or not involving a third-party claim (collectively,
"DAMAGES"), arising from or in connection with:
- any breach of any representation or warranty made by the other
party in the Stock Purchase Agreement or any related documents;
- any breach by the other party of any covenant or obligation of
such party contained in the Stock Purchase Agreement; or
- any claim by any person for brokerage or finder's fees or
commissions based upon any agreement or understanding alleged to
have been made by such person with the Company or Spescom, as the
case may be, in connection with the transactions. (Sections 10.1
and 10.2)
With certain customary exceptions, such as in the case of intentional
or knowing breaches of representations, warranties or covenants:
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<PAGE>
- the Company will not be liable to Spescom and its affiliates for
indemnification until the total amount of all Damages exceeds
$50,000, and then only for the amount by which such Damages
exceed $50,000; and
- the Company will not be liable to Spescom for indemnification
claims in excess of $3,700,000. (Section 10.3)
With certain customary exceptions, such as in the case of intentional
or knowing breaches of representations, warranties or covenants:
- Spescom will not be liable to the Company and its affiliates for
indemnification until the total amount of all Damages exceeds
$50,000, and then only for the amount by which such Damages
exceed $50,000; and
- Spescom will not be liable to the Company for indemnification
claims in excess of $3,700,000. (Section 10.4)
CONDITIONS TO THE TRANSACTIONS
CONDITIONS TO THE OBLIGATION OF THE COMPANY. The obligation of the
Company to consummate the transactions contemplated by the Stock Purchase
Agreement is subject to the satisfaction of, or waiver by the Company of, the
following conditions:
- Spescom's representations and warranties shall be true and
correct in all material respects as of the closing date, and
Spescom shall have complied with the covenants, agreements and
obligations required to be performed by it at or prior to the
closing; (Section 6.1)
- there shall not be any order, decree, injunction or judgment
enjoining the consummation of the transactions; (Section 6.2)
- the Company's shareholders shall have approved the transactions
contemplated by the Stock Purchase Agreement; (Section 6.3)
- all required third-party consents and approvals shall have been
obtained; (Section 6.4)
- Spescom shall have delivered a closing certificate to the
Company; (Section 6.5)
- all proceedings taken in connection with the transactions and all
documents necessary in order to consummate the transactions shall
be satisfactory to the Company; (Section 6.6) and
- the Company shall have received the opinion of Solomon Ward
Seidenwurm & Smith, LLP, counsel to Spescom, in form and
substance satisfactory to the Company's counsel (Section 6.7).
CONDITIONS TO THE OBLIGATION OF SPESCOM. The obligation of Spescom to
consummate the transactions contemplated by the Stock Purchase Agreement is
subject to the satisfaction of, or waiver by Spescom of, the following
conditions:
- the Company's representations and warranties shall be true and
correct in all material respects as of the closing date, and the
Company shall have complied with the covenants, agreements and
obligations required to be performed by it at or prior to the
closing; (Section 7.1)
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<PAGE>
- there shall not be any order, decree, injunction or judgment
enjoining the consummation of the transactions; (Section 7.2)
- the Company's shareholders shall have approved the transactions
contemplated by the Stock Purchase Agreement; (Section 7.3)
- all required third-party consents and approvals shall have been
obtained; (Section 7.4)
- Spescom shall have completed the purchase of the Finova
Instruments from Finova; (Section 7.5)
- the Company shall have issued to Spescom a new Stock Purchase
Warrant to replace the warrant Spescom purchased from Finova (for
300,000 shares of Common Stock at an exercise price of $1.90 per
share); (Section 7.6)
- the Company shall have entered into an employment agreement with
Roger Erickson, its President and Chief Executive Officer, on
terms reasonably satisfactory to Spescom; (Section 7.8)
- Spescom shall have obtained the approval of the South African
Reserve Bank under the South African Exchange Control
Regulations; (Section 7.9)
- the Company shall have delivered certified Articles of
Incorporation and good standing and a customary closing
certificate to Spescom; (Section 7.10 and 7.11)
- all proceedings taken in connection with the transactions and all
documents necessary in order to consummate the transactions shall
be reasonably satisfactory to Spescom; (Section 7.12) and
- Spescom shall have received the opinion of Gibson, Dunn &
Crutcher LLP, counsel to the Company, in form and substance
satisfactory to Spescom's counsel. (Section 7.13)
FAILURE TO CLOSE. If the Company fails to consummate the Stock Purchase
Agreement because shareholder approval is not received, then:
- if Spescom has satisfied (or the Company has waived) the
conditions to closing set forth in Sections 6.1, 6.2, 6.4 and
6.5, the Company will nonetheless transfer its entire 40%
ownership interest in Altris U.K. and, subject to the Company
satisfying or Spescom waiving the conditions set forth in
Sections 7.1 and 7.11, Spescom will release to the Company the
$200,000 which had been placed in escrow to satisfy certain
claims relating to the transaction in which Spescom acquired its
60% interest in Altris U.K. from the Company; and
- Spescom may thereupon elect to be relieved of all further
obligations under the Stock Purchase Agreement. (Section 8.2)
BUSINESS OF SPESCOM
Spescom Limited is a South African investment holding company. Through
its subsidiaries, operating divisions and joint venture companies, Spescom
focuses on the communications and information technology (CIT) market with a
comprehensive range of infrastructural solutions as well as
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business applications. Spescom's marketing and technological skills combined
with cutting-edge products have positioned it as a leading solutions provider of
CIT products and systems. Through exclusive alliances with world leaders and
innovative product development, Spescom is able to meet the needs of customers -
both locally and in selected markets abroad. Spescom is currently a 60%
shareholder with the Company in a U.K. joint venture (Altris U.K.) and owns
approximately 3.4 million shares of the Company's common stock.
You should refer to the Spescom financial statements included as part
of this proxy statement for a more complete understanding of Spescom's business.
The information contained in this section and in the Spescom financial
statements has been provided to the Company by Spescom and the Company has not
verified the accuracy or completeness thereof.
CONSENT OF MERRILL LYNCH
Under the terms of the Company's loan agreement with Merrill Lynch
Business Financial Services, Inc. ("MERRILL LYNCH"), the consent of Merrill
Lynch to the proposed transactions with Spescom is required before those
transactions can be consummated. The loan agreement contains certain restrictive
covenants, including the maintenance of a minimum ratio of debt to tangible net
worth. As of September 30, 1999, the Company was in violation of such covenants.
The Company obtained a waiver of such violations through March 15, 2000. In May
1999, in order to obtain the consent for the May 1999 Transactions with Spescom
from the lender, the Company agreed to reduce the principal balance of its
outstanding debt to Merrill Lynch by a total of $150,000 on or before June 30,
1999. The Company has not made this payment and is in violation of the
agreement. There can be no assurance that Merrill Lynch will consent to the
proposed transactions with Spescom, and therefore there can be no assurance that
the Spescom transactions will be consummated even if the shareholders approve
them.
CONCLUSION
The Board of Directors has directed that approval of the transactions
contemplated by the Stock Purchase Agreement be submitted for shareholder
approval. The affirmative vote of a majority of the shares of Common Stock and
Series E Preferred Stock represented at the meeting, voting together as a class,
will be required for approval of the Stock Purchase Agreement and the
transactions contemplated thereby. In the absence of approval, the Company will
not consummate those transactions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR APPROVAL OF THE TRANSACTIONS CONTEMPLATED BY THE STOCK PURCHASE
AGREEMENT.
When a proxy in the form of the proxy enclosed with this proxy
statement is returned properly executed, unless marked to the contrary, such
proxy will be voted in favor of the transactions contemplated by the Stock
Purchase Agreement.
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ITEM 2
APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED
SHARES OF COMMON STOCK
The Board of Directors has adopted a resolution amending Article III of
the Company's Articles of Incorporation to increase the authorized shares of
Common Stock from 30,000,000 shares to 40,000,000 shares, thereby increasing the
total number of authorized shares of capital stock from 31,000,000 to 41,000,000
(the "CHARTER AMENDMENT"). To effect the Charter Amendment, Article III of the
Articles of Incorporation would be amended and restated to read as follows:
"This corporation is authorized to issue two classes of shares of
stock, designated, respectively as Common Stock and Preferred Stock.
The total number of shares of all classes of stock that this
Corporation is authorized to issue is Forty-One Million (41,000,000),
consisting of Forty Million (40,000,000) shares of Common Stock and One
Million (1,000,000) shares of Preferred Stock."
At the close of business on January 24, 2000, there were:
- 13,101,734 shares of Common Stock issued and outstanding,
- 1,170,250 shares of Common Stock issuable upon the exercise of
outstanding stock options,
- 1,801,381 shares of Common Stock issuable upon the conversion of
up to 3,000 shares of Series E Convertible Preferred Stock and
accrued dividends;
- 360,000 shares of Common Stock issuable upon exercise of
outstanding warrants; and
- up to 700,000 shares of Common Stock issuable upon the exercise
of warrants which the Company may be required to grant under
certain preferred stock and debt purchase agreements during the
period June 27, 2000 through June 27, 2002.
In addition to the shares of Common Stock that will be issued to
Spescom if the Company's shareholders approve the transactions contemplated
by the Stock Purchase Agreement, the Company has agreed to issue 2,304,271
shares of Common Stock in connection with settling class action litigation
arising out of the Company's restatement of its financial statements for 1996
and the nine months ended September 30, 1997.
The increase in the authorized number of shares is proposed for the
following reasons:
- to allow the Company to consummate the transactions contemplated
by the Stock Purchase Agreement;
- to enable the Company to grant additional stock options or other
stock-based compensation to its employees and consultants; and
- where advantageous to the Company, to issue shares of its capital
stock in order to raise additional capital, in connection with
future acquisitions or other business combinations or for other
purposes.
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The Company believes that the number of shares of Common Stock that
would be available for issuance following adoption of the Charter Amendment
would be sufficient for any purposes foreseeable by the Company. Except as set
forth in the bullet points above, in connection with settling the class action
litigation and as contemplated by the Stock Purchase Agreement, the Company does
not have plans, commitments or understandings to issue any of the additional
shares of Common Stock that would be authorized if the Charter Amendment is
approved. Other than increasing the number of authorized shares of the Company's
Common Stock, the proposal to increase the authorized shares of Common Stock
will not affect the rights, preferences or privileges of the Company's
shareholders.
The Board of Directors has directed that the Charter Amendment be
submitted for shareholder approval. The affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting will
be required for approval of the Charter Amendment. In the absence of approval,
the authorized number of shares of Common Stock will remain 30,000,000.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR APPROVAL OF THE CHARTER AMENDMENT TO INCREASE THE AUTHORIZED SHARES OF
COMMON STOCK.
When a proxy in the form of the proxy enclosed with this proxy
statement is returned properly executed, unless marked to the contrary, such
proxy will be voted in favor of the increase in authorized shares of Common
Stock contemplated by the Charter Amendment.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following reports, filed by the Company pursuant to the Securities
Exchange Act of 1934, are incorporated herein by reference:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Report on Form 10-Q for the three months ended March
31, 1999;
- Quarterly Report on Form 10-Q for the three and six months ended
June 30, 1999;
- Quarterly Report on Form 10-Q for the three and nine months ended
September 30, 1999.
Any statement contained in any of these documents, however, shall be
deemed modified or superseded for the purposes of this proxy statement to the
extent that a statement contained in this proxy statement is inconsistent with
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this proxy
statement.
Pursuant to SEC regulations, the Company will provide to each
shareholder of record on the Record Date, without charge and upon written or
oral request of such person, copies of the reports incorporated herein by
reference. Requests should be directed to the Company at its principal executive
offices.
SOLICITATION OF PROXIES
The cost of this solicitation of proxies will be borne by the Company.
Solicitation will be made by mail, telephone or telegram and personally by
directors, officers and other employees of the Company, but such persons will
not receive compensation for such services over and above their regular
salaries. The Company will reimburse brokers, banks, custodians, nominees and
fiduciaries holding stock in their names or in the names of their nominees for
their reasonable charges and expenses in forwarding proxy material to the
beneficial owners of such stock.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
ALTRIS SOFTWARE, INC.
AUDITED FINANCIAL STATEMENTS
<S> <C>
Report of Grant Thornton LLP, Independent Certified
Public Accountants............................................... F-2
Report of Price Waterhouse LLP, Independent Accountants............. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997......... F-4
Consolidated Statements of Operations for the fiscal years ended
December 31, 1998, 1997 and 1996................................. F-5
Consolidated Statement of Changes in Shareholders' Equity (Deficit)
for the fiscal years ended December 31, 1998, 1997 and 1996...... F-6
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1998, 1997 and 1996................................. F-7
Notes to the Consolidated Financial Statements....................... F-8
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 (audited).................................. F-24
Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998................................ F-25
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998...................................... F-26
Notes to the Unaudited Consolidated Financial Statements............. F-28
SPESCOM LIMITED
Results of Operations for the 12 months ended September 30, 1999
and 1998 ........................................................ F-36
Balance Sheets as of September 30, 1999 and 1998..................... F-37
Abridged Cash Flow Statement for the 12 months ended September 30,
1999 and 1998 ................................................... F-38
Other Financial Information.......................................... F-39
Notes to the Financial Statements.................................... F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Altris Software, Inc.
We have audited the accompanying consolidated balance sheet of Altris
Software, Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Altris
Software, Inc. as of December 31, 1998 and the consolidated results of its
operations and its consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
We have also audited Schedule II of Altris Software, Inc. for the year ended
December 31, 1998. In our opinion, this Schedule presents fairly, in all
material respects, the information required to be set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has experienced
recurring losses from operations and has deficiencies in working capital and
stockholders' equity. Also, the Company has significant amounts of debt
maturing in the year ending December 31, 1999. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Irvine, California
March 23, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Altris Software, Inc.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position, results of operations and cash
flows of Altris Software, Inc. and its subsidiaries as of and for each of the
two years in the period ended December 31, 1997 listed in the index appearing
under Item 14 (a)(1) on page 50, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14 (a)(2) on page 50,
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The Company's consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has an accumulated deficit that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. We have not audited the consolidated financial statements of
Altris Software, Inc. and its subsidiaries for any period subsequent to
December 31, 1997.
/s/ PRICE WATERHOUSE LLP
San Diego, California
May 12, 1998
F-3
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
1998 1997
---------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 530,000 $ 1,938,000
Short term investments -- 133,000
Receivables, net 1,128,000 3,045,000
Inventory, net 277,000 460,000
Other current assets 244,000 633,000
------------ ------------
Total current assets 2,179,000 6,209,000
Property and equipment, net 1,565,000 2,270,000
Computer software, net 4,685,000 3,042,000
Goodwill, net 2,645,000 3,914,000
Other assets 292,000 401,000
------------ ------------
Total assets $ 11,366,000 $ 15,836,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,779,000 $ 2,928,000
Accrued liabilities 1,934,000 2,758,000
Notes payable 745,000 730,000
Deferred revenue 3,230,000 1,770,000
------------ ------------
Total current liabilities 8,688,000 8,186,000
Long term notes payable 468,000 274,000
Deferred revenue, long term portion 2,131,000 --
Other long term liabilities 1,263,000 173,000
Subordinated debt, net of discount 2,591,000 2,473,000
------------ ------------
Total liabilities 15,141,000 11,106,000
------------ ------------
Commitments -- --
Mandatorily redeemable convertible preferred
stock, $1,000 par value, 3,000 shares
authorized; 3,000 shares issued and
outstanding ($3,350,000 and $3,000,000 total
liquidation preference, respectively) 3,003,000 2,682,000
Shareholders' (deficit) equity:
Common stock, no par value, 20,000,000 shares
authorized; 9,614,663 issued and outstanding
in 1998 and 1997 61,201,000 61,600,000
Common stock warrants 585,000 585,000
Accumulated other comprehensive income (10,000) 25,000
Accumulated deficit (68,554,000) (60,162,000)
------------ ------------
Total shareholders' (deficit) equity (6,778,000) 2,048,000
------------ ------------
Total liabilities and shareholders'
(deficit) equity $ 11,366,000 $ 15,836,000
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Year Ended December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Licenses $ 4,189,000 $ 8,154,000 $ 9,554,000
Services and other 8,614,000 9,619,000 9,995,000
------------ ------------ ------------
Total revenue 12,803,000 17,773,000 19,549,000
------------ ------------ ------------
Cost of revenues:
Licenses 1,553,000 2,059,000 2,194,000
Services and other 5,474,000 7,324,000 7,346,000
------------ ------------ ------------
Total cost of revenue 7,027,000 9,383,000 9,540,000
------------ ------------ ------------
Gross profit 5,776,000 $ 8,390,000 $ 10,009,000
============ ============ ============
Operating expenses:
Research and development $ 2,314,000 $ 4,155,000 $ 3,363,000
Marketing and sales 4,385,000 8,179,000 5,581,000
General and administrative 5,083,000 4,241,000 3,077,000
Settlement of lawsuits 1,128,000 - -
Write off of capitalized software 625,000 - -
Write down of assets to net realizable value - 190,000 -
Loss on office closure - - 410,000
------------ ------------ ------------
Total operating expenses 13,535,000 16,765,000 12,431,000
------------ ------------ ------------
Loss from operations (7,759,000) (8,375,000) (2,422,000)
Interest and other income 31,000 383,000 88,000
Interest and other expense (664,000) (447,000) (114,000)
------------ ------------ ------------
Net loss $ (8,392,000) $ (8,439,000) $ (2,448,000)
============ ============ ============
Basic net loss per common share $ (.92) $ (.90) $ (.26)
============ ============ ============
Diluted net loss per common share $ (.92) $ (.90) $ (.26)
============ ============ ============
Shares used in computing basic and diluted
net loss per common share 9,615,000 9,585,000 9,250,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common
Preferred Stock Common Stock Stock
--------------- ------------ --------
Shares Amount Shares Amount Warrants
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 172,500 $ 3,306,000 8,475,452 $
Exercise of stock options - - 316,875 1,263,000 -
Conversion of Series B Preferred Stock to
Common Stock (172,500) (3,306,000) 406,617 3,306,000 -
Issuance of Series C Preferred Stock 100,000 1,964,000 - - -
Conversion of Series C
Preferred Stock to Common Stock (100,000) (1,964,000) 236,000 1,964,000 -
Conversion of note to Common Stock - - 125,000 965,000 -
Foreign currency translation adjustment - - - - -
Net loss - - - - -
Total Comprehensive Income
-------- ------------ ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1996 - - 9,559,944 61,583,000 -
Exercise of stock options - - 54,719 193,000 -
Issuance of common stock warrants - - - - 585,000
Preferred stock dividends - - - (176,000) -
Foreign currency translation adjustment - - - - -
Net loss - - - - -
Total Comprehensive Income
-------- ------------ ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1997 - - 9,614,663 61,600,000 585,000
Foreign currency translation adjustment - - - - -
Preferred stock dividends - - - (408,000) -
Stock option issued as compensation to
non-employee - - - 9,000 -
Net loss - - - - -
Total Comprehensive Income
-------- ----------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1998 $ - 9,614,663 $61,201,000 $585,000
======== =========== ========= =========== =========
Accumulated
Other
Comprehensive Accumulated Comprehensive
Income Deficit Total Income
------ ------- ----- ------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ - $ (49,275,000) $ 8,116,000
Exercise of stock options - - 1,263,000 -
Conversion of Series B Preferred Stock to
Common Stock - - - -
Issuance of Series C Preferred Stock - - 1,964,000 -
Conversion of Series C
Preferred Stock to Common Stock - - - -
Conversion of note to Common Stock - - 965,000 -
Foreign currency translation adjustment 3,000 - 3,000 3,000
Net loss - (2,448,000) (2,448,000) (2,448,000)
-----------
Total Comprehensive Income $ (2,445,000)
===========
---------- ------------ ---------- ----------
BALANCE AT DECEMBER 31, 1996 3,000 (51,723,000) 9,863,000
Exercise of stock options - - 193,000 $ -
Issuance of common stock warrants - - 585,000 -
Preferred stock dividends - - (176,000) -
Foreign currency translation adjustment 22,000 - 22,000 22,000
Net loss - (8,439,000) (8,439,000) (8,439,000)
-----------
Total Comprehensive Income (8,417,000)
===========
---------- ------------ ---------- ----------
BALANCE AT DECEMBER 31, 1997 25,000 (60,162,000) 2,048,000
Foreign currency translation adjustment (35,000) - (35,000) $ (35,000)
Preferred stock dividends - - (408,000) -
Stock option issued as compensation to
non-employee - - 9,000 -
Net loss - (8,392,000) (8,392,000) (8,392,000)
-----------
Total Comprehensive Income $ (8,427,000)
===========
---------- ------------ ----------
BALANCE AT DECEMBER 31, 1998 $ (10,000) $ (68,554,000) $ (6,778,000)
========== ============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,392,000) $ (8,439,000) $ (2,448,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,659,000 2,389,000 2,000,000
Loss on disposal of assets 46,000 15,000 12,000
Settlement of lawsuits 1,128,000 -
Write off of capitalized software 625,000 - -
Write down of assets to net realizable value - 190,000 -
Changes in assets and liabilities, net of effect
of acquisitions:
Receivables, net 1,917,000 2,005,000 (843,000)
Inventory 183,000 12,000 (3,000)
Other assets 403,000 328,000 (569,000)
Accounts payable (149,000) 441,000 295,000
Accrued liabilities (815,000) 1,072,000 (1,525,000)
Deferred revenue 3,591,000 222,000 319,000
Other long term liabilities (38,000) (590,000) (182,000)
-------------- ------------ ----------------
Net cash provided by (used in) operating activities 1,158,000 (2,355,000) (2,944,000)
-------------- ------------ ----------------
Cash flows from investing activities:
Sale or maturity of short term investments 133,000 1,652,000 180,000
Purchases of short term investments held to maturity - (1,499,000) -
Purchases of property and equipment (137,000) (833,000) (1,142,000)
Purchases of software (294,000) (41,000) (306,000)
Computer software capitalized (2,355,000) (1,651,000) (1,078,000)
-------------- ------------ ----------------
Net cash used in investing activities (2,653,000) (2,372,000) (2,346,000)
-------------- ------------ ----------------
Cash flows from financing activities:
Repayments of revolving loan and bank agreements (333,000) (2,689,000) (212,000)
Net borrowings under revolving loan and bank
agreements 542,000 1,780,000 1,450,000
Net proceeds from issuance of preferred stock - 2,653,000 1,964,000
Payment of preferred stock dividends (87,000) (147,000) -
Net proceeds from issuance of subordinated debt and
warrants - 3,000,000 -
Cash payments for debt issuance costs - (347,000) -
Proceeds from exercise of stock options - 193,000 1,263,000
Principal payment under cash advanced by a bank
related to former Optigraphics shareholder
notes payable - - (1,634,000)
-------------- ------------ ----------------
Net cash provided by financing activities 122,000 4,443,000 2,831,000
-------------- ------------ ----------------
Effect of exchange rate changes on cash (35,000) 22,000 3,000
-------------- ------------ ----------------
Net decrease in cash and cash equivalents (1,408,000) (262,000) (2,456,000)
Cash and cash equivalents at beginning of period 1,938,000 2,200,000 4,656,000
-------------- ------------ ----------------
Cash and cash equivalents at end of period $ 530,000 $ 1,938,000 $ 2,200,000
============== ============ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - LIQUIDITY AND CAPITAL RESOURCES:
The Company has suffered recurring losses, and has an accumulated
deficit of $68,554,000, a working capital deficit of $6,509,000 and a deficit in
shareholders' equity of $6,778,000 as of December 31, 1998, which raise
substantial doubt about the Company's ability to continue as a going concern.
Due to significant losses and decreasing sales, the Company, in 1998, reduced
its payroll cost, the largest cost element. In addition, the Company has made
further reductions of other expenditures. In the first quarter of 1999, the
Company has experienced a reduction in incoming orders. The Company's ability to
continue operations is dependent upon the generation of new system sales of
Altris EB in the near term, which cannot be assured. Given the substantial
uncertainties confronting the Company, there can be no assurance that sufficient
cash flows will be generated by the Company in the near term to meet its current
obligations. Accordingly, the Company is investigating raising additional cash
through a debt or equity offering or other means. Management believes that such
additional cash through the issuance of debt or equity will be necessary to
enable the Company to meet its short-term needs for working capital. There can
be no assurance that additional debt or equity financing will be available, or
that, if available, such financing could be completed on commercially favorable
terms. Failure to obtain additional financing in the near future, can be
expected to have a material adverse affect on the Company's business, results of
operations, and financial condition.
NOTE 2 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
The Company develops, markets and supports a suite of object-oriented,
client/server document management software products. These products were
developed to enable customers in a broad range of industries to effectively and
efficiently manage, share and distribute critical business information,
expertise and other intellectual capital.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
FOREIGN CURRENCY
The functional currency of the Company's United Kingdom subsidiary is
the pound sterling. Assets and liabilities are translated into U.S. dollars at
end-of-period exchange rates. Revenues and expenses are translated at average
exchange rates in effect for the period. Net currency exchange gains or losses
resulting from such transaction are excluded from net income and accumulated as
other comprehensive income in a separate component of shareholders' equity.
Gains and losses resulting from foreign currency transactions, which are not
significant, are included in the Consolidated Statements of Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and also
requires disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates made by management include
F-8
<PAGE>
realizability of deferred income tax assets, capitalized software costs,
goodwill, 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
software and hardware. In 1998, the Company recognized revenue in accordance
with Statement of Position 97-2 "Software Revenue Recognition." In 1997 and
1996, the Company recognized revenue in accordance with Statement of Position
91-1 "Software Revenue Recognition". The implementation of 97-2 in 1998 did not
materially affect the Company's revenue recognition policies. Software license
and third party product revenues are recognized upon shipment of the product if
no significant vendor obligations remain and collection is probable. In cases
where a significant vendor obligation exists, revenue recognition is delayed
until such obligation has been satisfied. Annual maintenance revenues, which
consist of ongoing support and product updates, are recognized on a
straight-line basis over the term of the contract. Payments received in advance
of performance of the related service for maintenance contracts are recorded as
deferred revenue. Revenues from training and consulting services are recognized
when the services are performed and adequate evidence of providing such services
is available. Contract revenues for long term contracts or programs requiring
specialized systems are recognized using the percentage-of-completion method of
accounting, primarily based on contract labor hours incurred to date compared
with total estimated labor hours at completion. Provisions for anticipated
contract losses are recognized at the time they become known.
Contracts are billed based on the terms of the contract. There are no
retentions in billed contract receivables. Unbilled contract receivables relate
to revenues earned but not billed at the end of the period. Billings in excess
of costs incurred and related earnings are included in deferred revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107 ("SFAS 107") ,
"Disclosures About Fair Value of Financial Instruments", requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as cash or a contractual obligation that both conveys to one entity
a right to receive cash or other financial instruments from another entity, and
imposes on the other entity the obligation to deliver cash or other financial
instruments to the first entity. At December 31, 1998, management believes that
the carrying amounts of cash and cash equivalents, short-term investments,
receivable and payable amounts, and accrued expenses approximate fair value
because of the short maturity of these financial instruments. The Company
believes that the carrying value of its loans and lines of credit approximate
their fair values as they reprice based on the prime rate and adjust for
significant changes in credit risk, and the carrying value of the subordinated
debt approximates its fair value.
SHORT TERM INVESTMENTS
Management determines the appropriate classification of its investments
in marketable debt and equity securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. As of December 31,
1997, the Company had $133,000 in debt securities with a maturity date of one
year or less. The Company has classified its debt securities as held to maturity
and records such securities at amortized cost. In 1998, the Company redeemed its
debt securities at maturity with no realized gains or losses. Unrealized gains
and losses were not significant in 1997.
F-9
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
The Company provides products and services to customers in a variety of
industries worldwide, including petrochemicals, utilities, manufacturing and
transportation. Concentration of credit risk with respect to trade receivables
is limited due to the geographic and industry dispersion of the Company's
customer base.
INVENTORY
Inventory consists of parts, supplies and subassemblies primarily used
in maintenance contracts which service the Company's hardware products sold in
prior years. Inventory is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. As of December 31, 1998
and 1997, the Company has provided a reserve of $651,000 and $511,000,
respectively, to reduce the carrying amount to its estimated net realizable
value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated by the
straight-line method over useful lives of two to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
useful life or the term of the related lease. Expenditures for ordinary repairs
and maintenance are expensed as incurred while major additions and improvements
are capitalized.
GOODWILL
Goodwill represents the excess of cost of purchased businesses over the
fair value of tangible and identifiable intangible net assets acquired at the
date of acquisition. Goodwill is amortized over its estimated useful life of
four to seven years. The Company evaluates the carrying value of unamortized
goodwill at each balance sheet date to determine whether any adjustments are
required. In late 1998, the Company reduced the life of the goodwill associated
with its London subsidiary from seven to four years as a result of uncertainties
regarding future benefits to the Company provided by goodwill due to recurring
significant losses and negative cash flow of the subsidiary. Accumulated
amortization of goodwill was $3,014,000 and $1,745,000 at December 31, 1998 and
1997, respectively. The related amortization expense was $1,269,000, $853,000
and $746,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE
Software development costs and purchased software are capitalized when
technological feasibility and marketability of the related product have been
established. Software development costs incurred solely in connection with a
specific contract are charged to cost of revenues. Capitalized software costs
are amortized on a product-by-product basis, beginning when the product is
available for general release to customers. Annual amortization expense is
calculated using the greater of the ratio of each product's current gross
revenues to the total of current and expected gross revenues or the straight
line method over the estimated useful life of three to four years. Accumulated
amortization of capitalized software costs was $1,216,000 and $1,352,000 at
December 31, 1998 and 1997, respectively. The related amortization expense was
$381,000, $712,000 and $614,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The Company evaluates the carrying value of unamortized
capitalized software costs at each balance sheet date to determine whether any
impairment adjustments are required. In late 1998, the Company made certain
changes in the architecture of its Altris EB product to utilize Microsoft
Transaction Server. As a result of these changes, the Company abandoned a
certain portion of
F-10
<PAGE>
its previously developed server code and expensed the related capitalized
software costs totaling $625,000 in 1998. At December 31, 1998, total
capitalized software costs associated with Altris EB totaled $4,672,000, of
which $2,355,000 was capitalized in 1998.
In 1997, the Company wrote off $190,000 of certain capitalized software
development costs related to products for which costs were deemed to be
unrecoverable due to the future product direction of the Company.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs related to the Subordinated Debt (see Note
4) are recorded at cost and are being amortized over 5 years using the
straight-line method, which is considered to approximate the effective interest
rate method. Accumulated amortization of debt issuance costs was $104,000 and
$34,000 at December 31, 1998 and 1997, respectively. The related amortization
expense was $70,000 and $34,000 for the years ended December 31, 1998 and 1997,
respectively.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances have made
recovery of the asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset.
STOCK BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss and basic and diluted net loss per share as if the fair
value-based method had been applied in measuring compensation expense.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the change during the year in the deferred
income tax asset or liability. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be "more
likely than not" realized in the future based on the Company's current and
expected operating results.
NET LOSS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
("SFAS 128"), "Earnings Per Share", for fiscal 1997 and retroactively restated
all prior periods to conform with SFAS 128 as required. Basic net loss per
common share is computed as net loss plus accretion of dividends on mandatorily
redeemable convertible preferred stock divided by the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed as net loss divided by the weighted average number of common shares
and potential common shares, using the treasury stock method, outstanding during
the period and assumes conversion into common stock at the beginning of each
period of all outstanding shares of convertible preferred stock. Computations of
basic and diluted
F-11
<PAGE>
earnings per share do not give effect to individual potential common stock
instruments for any period in which their inclusion would be anti-dilutive.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company implemented SFAS No. 130 effective January 1,
1998.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March of 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. In December of 1998, the AICPA
also issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions", which applies to certain multiple-element
arrangements. The Company will implement both SOP's effective January 1, 1999,
which will not have a material effect on the Company's results of operations.
REVERSE STOCK SPLIT
In October 1996, the shareholders of the Company approved an amendment
to the Company's Articles of Incorporation to effectuate a 1-for-2 reverse stock
split of all outstanding shares of the Company's common stock. All references in
the Consolidated Financial Statements and in these notes have been restated to
reflect the split.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
F-12
<PAGE>
STATEMENT OF CASH FLOWS
Cash and cash equivalents are comprised of cash on hand and short-term
investments with original maturities of less than 90 days.
The following table provides supplemental cash flow information:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid $ 445,000 $ 294,000 $ 75,000
============== ============= ==============
Schedule of noncash financing activities:
Conversion of Preferred Stock and note payable
to Common Stock $ - $ - $ 6,235,000
============== ============= ==============
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 408,000 $ 29,000 $ -
============== ============= ==============
Stock option issued as compensation
to non-employee $ 9,000 $ - $ -
============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
NOTE 3 - BALANCE SHEET INFORMATION:
December 31,
--------------------------------------
1998 1997
---- ----
<S> <C> <C>
RECEIVABLES, NET:
Billed receivables $ 1,193,000 $ 3,111,000
Unbilled receivables 129,000 219,000
Less allowance for doubtful accounts (194,000) (285,000)
------------- --------------
$ 1,128,000 $ 3,045,000
============= ==============
PROPERTY AND EQUIPMENT, NET:
Computer equipment $ 6,339,000 $ 6,269,000
Machinery and equipment 455,000 549,000
Furniture and fixtures 602,000 594,000
Leasehold improvements 570,000 548,000
------------- --------------
7,966,000 7,960,000
Less accumulated depreciation
and amortization (6,401,000) (5,690,000)
------------- --------------
$ 1,565,000 $ 2,270,000
============= ==============
ACCRUED LIABILITIES:
Advance from customer $ - $433,000
Employee compensation and related expenses 228,000 568,000
Accrued vacation 261,000 293,000
Sales and VAT taxes payable 255,000 253,000
Accrued loss on office closure 29,000 42,000
Other 1,161,000 1,169,000
------------- --------------
$ 1,934,000 $ 2,758,000
============= ==============
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
---- ----
<S> <C> <C>
OTHER LONG TERM LIABILITIES:
Accrued loss on office closure $ 77,000 $ 98,000
Settlement of lawsuits 1,128,000 -
Other 58,000 75,000
------------- -------------
$ 1,263,000 $ 173,000
============= =============
</TABLE>
NOTE 4 - NOTES PAYABLE AND SUBORDINATED DEBT:
Notes payable and subordinated debt consist of the following:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997
---- ----
<S> <C> <C>
United Kingdom overdraft facility $ 375,000 $ 430,000
Revolving loans 838,000 574,000
Subordinated debt, less discount of $409,000 in 1998
and $527,000 in 1997 2,591,000 2,473,000
------------- -------------
$ 3,804,000 $ 3,477,000
============= =============
</TABLE>
In October 1998, the Company's United Kingdom subsidiary renewed an
overdraft facility with a bank. At December 31, 1998 interest is calculated at
3.0% per annum over the bank's base rate (9.5% at December 31, 1998). At
December 31, 1997, interest was calculated at 2% per annum over the bank's base
rate (9.25% at December 31, 1997). Currently the facility is for $415,000
(L250,000) and is payable on demand. At December 31, 1998 and 1997, $375,000
and $430,000, respectively, was outstanding. Repayment of the borrowings under
the facility are collateralized by the property and assets of the Company's
United Kingdom subsidiary, including a L100,000 certificate on deposit. The
Company has also executed a guarantee in connection with the facility.
The Company has two revolving loan and security agreements, each
providing for borrowings of up to $1,000,000. The maximum credit available
under each facility declines by $200,000 each year beginning in March 1997 and
September 1996, respectively. Each loan is payable in monthly installments of
$16,667 plus interest equal to the 30-day Commercial Paper Rate plus 2.95%
(8.05% and 8.80% at December 31, 1998 and 1997, respectively). At December 31,
1998, $838,000 was outstanding under these two agreements with no additional
funds available. At December 31, 1997, $574,000 was outstanding. Total
borrowings under the revolving loan and security agreements are collateralized
by the Company's assets. The revolving loan and security agreements contain
certain restrictive covenants including the maintenance of a minimum ratio of
debt to tangible net worth. As of December 31, 1998, the Company was in
violation of such covenants. The Company obtained a waiver of such violations
through March 15, 2000.
In June 1997, the Company issued a five year, 11.5% subordinated
debenture with quarterly interest payments for gross proceeds of $3,000,000. In
conjunction with the debt, the Company granted warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $6.00 per share.
The warrants are exercisable over a five-year period from the date of issuance.
A portion of the proceeds from the debt has been allocated to common stock
warrants, which were valued at $585,000. In the event the debt is outstanding
at June 2000, and each year thereafter, the Company will grant in each year
additional five year warrants to purchase 50,000 shares of common stock at an
exercise price of $7.00 per share. A value has not been ascribed to these
contingent warrants. At such time that the
F-14
<PAGE>
warrants are no longer contingent, a value, if any, will be ascribed. In
November 1998, the Company entered into a Security Agreement with the Investor
providing the Investor with a second priority security interest in the
inventory, accounts receivable, general intangibles and certain other assets of
the Company. The Investor's security interest is subordinated to the first
priority security interest of the lender under the Company's revolving credit
agreements.
At December 31, 1995, the Company had an outstanding convertible note
in connection with the acquisition of Trimco. The principal balance of
$1,000,000 together with interest at 7% per annum was due on September 27, 1996.
The note was convertible into common stock at the rate of $8.00 per share, or an
aggregate of 125,000 shares. The note was secured by a second-priority lien on
the Company's assets, subject to the first-priority lien held by the lender in
connection with the Company's existing revolving loan agreement. In February
1996, the note was converted into 125,000 shares of the Company's common stock,
and no further obligations remain under the note.
In March 1997, the Company borrowed $300,000 from an officer of the
Company. The note was for a maximum of three months with a 12% per annum
interest rate. The entire balance and accrued interest was paid in July 1997.
Future maturities of long-term debt are as follows at December 31,
1998:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999 $ 745,000
2000 200,000
2001 200,000
2002 3,067,000
-------------
4,212,000
=============
Less unamortized discount (408,000)
-------------
$ 3,804,000
=============
</TABLE>
NOTE 5 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Loss Used:
Net loss $(8,392,000) $(8,439,000) $(2,448,000)
Accretion of dividends on mandatorily redeemable
convertible preferred stock (408,000) (176,000) --
-------------- ------------- ----------------
Net loss used in computing basic and diluted net loss
per share $(8,800,000) $(8,615,000) $(2,448,000)
============== ============= ================
Shares Used:
Weighted average common shares outstanding used in
computing basic and diluted net loss per common
share 9,615,000 9,585,000 9,250,000
============== ============= ================
</TABLE>
F-15
<PAGE>
Average employee stock options to acquire 739,000, 544,000 and 550,000,
shares, were outstanding in fiscal 1998, 1997 and 1996, respectively, but were
not included in the computation of diluted earnings per share because the effect
was antidilutive. In addition, at December 31, 1998, 1997 and 1996, 3,000, 3,000
and 100,000 shares, respectively, of convertible preferred stock were also
excluded from the computation of diluted earnings per share because the effect
was antidilutive.
NOTE 6 - FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter ending December 31,
1998 are summarized below. These adjustments do not result in adjustments to
previously released financial information for earlier quarters of fiscal 1998.
On March 3, 1999, the Company entered into a Memorandum of
Understanding providing for the settlement of certain securities class action
lawsuits pending against the Company. The Company recorded expense of $1,128,000
in the fourth quarter 1998 in connection with this settlement. In the fourth
quarter 1998, the Company made certain changes in the architecture of its Altris
EB product to utilize Microsoft Transaction Server. As a result of these
changes, the Company abandoned a certain portion of its previously developed
server code and expensed the related capitalized software costs totaling
$625,000. In addition, in the fourth quarter, 1998, the Company reduced the life
of the goodwill associated with its London subsidiary from seven to four years
as a result of uncertainties regarding future benefits to the Company provided
by the goodwill due to recurring significant losses and negative cash flow of
the subsidiary. The Company increased goodwill amortization expense by $450,000
in the fourth quarter to reflect this adjustment to the remaining estimated
useful life of goodwill associated with its London subsidiary.
<TABLE>
<S> <C>
Settlement of lawsuits $1,128,000
Capitalized software costs expensed due to change in
architecture of Altris EB 625,000
Additional amortization of goodwill 450,000
----------
Increase in net loss $2,203,000
==========
</TABLE>
NOTE 7 - CONVERTIBLE PREFERRED STOCK:
In June 1997, the Company issued 3,000 shares of its Series D
Convertible Preferred Stock (the "Series D Preferred Stock") for gross proceeds
of $3,000,000. The Series D Preferred Stock bears a dividend of 11.5% per annum
and is convertible into the Company's common stock at a price of $6.00 per share
subject to reset, as defined in the preferred stock agreement. Since March 1998
the Company has been in default of certain covenants under the Preferred Stock
Agreement, resulting in a dividend rate increase to 14% per annum. In addition,
if the Company fails to pay dividends on six consecutive dividend payment dates,
or the aggregate amount of unpaid dividends equals or exceeds $172.50 per share,
then the Investor shall be entitled to nominate an additional director to the
Company's board.
The Company may redeem the Series D Convertible Preferred Stock at its
option after June 1999 if an average trading price for the common stock equals
or exceeds $9.50 per share or after June 2002, irrespective of the trading
price. The Series D Preferred Stock redemption price per share is equal to the
sum of $1,000, plus all accrued and unpaid dividends and interest on such unpaid
dividends at an annual rate of 11.5% (increased to 14% as a result of the event
of default). If the number of shares issuable upon conversion of the Series D
Preferred Stock, when added to all other shares of common stock issued upon
F-16
<PAGE>
conversion of the Series D Preferred Stock and any shares of common stock issued
or issuable upon the exercise of the warrants would exceed 1,906,692 shares of
common stock (the "Issuable Maximum"), then the Company shall be obligated to
effect the conversion of only such portion of the Series D Preferred Stock
resulting in the issuance of shares of common stock up to the Issuable Maximum,
and the remaining portion of the Series D Preferred Stock shall be redeemed by
the Company for cash in accordance with the procedures set forth in the
Certificate of Determination. In the event of mandatory redemption, when the
number of shares exceeds the Issuable Maximum, the redemption price per share is
equal to the redemption price under the optional redemption feature, plus the
appreciation in the value of the Company's common stock and conversion price on
the date of redemption.
In connection with the issuance of the Series D Preferred Stock, the
Company has agreed to grant warrants to purchase the following number of shares
of its common stock if the Series D Preferred Stock remains outstanding on each
of the following dates: (i) on June 27, 2000 for 50,000 shares, at an exercise
price of $7.00 per share, if the Series D Preferred Stock has not been redeemed
or converted in full on or prior to June 27, 2000; (ii) on June 27, 2001 for
50,000 shares, at an exercise price of $7.00 per share, if the Series D
Preferred Stock has not been redeemed or converted in full on or prior to June
27, 2001; (iii) on July 17, 2002 for 250,000 shares, at an exercise price equal
to the trading price per share on the issuance date of the warrant, if the
Series D Preferred Stock has not been redeemed or converted in full on or prior
to July 17, 2002; and (iv) on June 27, 2003 for 250,000 shares, at an exercise
price equal to the trading price per share on the issuance date of the warrant,
if the Series D Preferred Stock has not been redeemed or converted in full on or
prior to June 27, 2003. Such warrants are exercisable over a five-year period
from the date of grant. A value has not been ascribed to these contingent
warrants. At such time that the warrants are no longer contingent, a value will
be ascribed, if any. In connection with the debt (see Note 4) and Series D
Convertible Preferred Stock issuance, the Company paid $120,000 to a director of
the Company for his service related to the offering.
Each share of Series D Preferred Stock is entitled to one vote on all
matters submitted to the holders of the common stock. In the event of
liquidation of the Company, the Series D Preferred Stockholders will receive in
preference to the common stockholders an amount equal to $1,000 per share plus
accrued but unpaid dividends and interest on all such dividends at an annual
rate of 11.5% (increased to 14% as a result of the event of default). In 1998,
dividends of $87,000 were paid on the Series D Preferred Stock and as of
December 31, 1998 accumulated unpaid dividends amounted to $350,000.
In April 1996, the Company issued 100,000 shares of its Series C
Convertible Preferred Stock in an offshore private placement to a purchaser who
is not a resident of the United States. The Company received gross proceeds of
$2,000,000. In June 1996, 37,500 shares of Series C Preferred Stock were
converted into 72,726 shares of common stock. In July 1996, the remaining 62,500
shares of Series C Preferred Stock plus accrued dividends were converted into
163,274 shares of common stock.
In December 1995, the Company issued 172,500 shares of its Series B
Convertible Preferred Stock for gross proceeds of $3,450,000. In February 1996,
the 172,500 shares of Series B Preferred Stock were converted into 406,617
shares of common stock.
NOTE 8 - COMMON STOCK OPTIONS:
At December 31, 1998, the Company had two stock-based compensation
plans (the "Plans"), which are described below. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its plans. No compensation cost was recognized for its employee stock option
grants, which were fixed in nature, as the options were granted at fair market
value. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair
F-17
<PAGE>
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,
--------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss used in computing net loss per share
As reported $ (8,800,000) $ (8,615,000) $ (2,448,000)
Pro forma $ (9,253,000) $(10,060,000) $ (3,022,000)
Basic and diluted net loss per share
As reported $ (.92) $ (.90) $ (.26)
Pro forma $ (.96) $(1.05) $ (.33)
</TABLE>
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 112.0% 78.0% 68.0%
Risk-free interest rate 5.1% 6.4% 6.2%
Expected lives (years) 5 5 4
</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. In August 1998, the
Shareholders approved an amendment to the Plan which increased from 625,000 to
925,000 the maximum number of shares of Common Stock that may be issued under
the 1996 Plan. There are 923,750 remaining authorized shares subject to grants
but unissued. Under the Company's 1987 Stock Option Plan, the maximum number of
shares of Common Stock issued were 1,200,000 of which there are no remaining
shares available for grant. There are 121,750 remaining authorized shares
available for future grants, but unissued.
The option vesting period under the plans is determined by the Board of
Directors or a Stock Option Committee and usually provides that 25% of the
options granted can be exercised 90 days from the date of grant, and thereafter,
those options become exercisable in additional cumulative annual installments of
25% commencing on the first anniversary of the date of grant. Options granted
are generally due to expire upon the sooner of ten years from date of grant,
thirty days after termination of services other than by reason of convenience of
the Company, three months after disability, or one year after the date of the
option holder's death. The option exercise price is equal to the fair market
value of the common stock on the date of grant.
Options granted to employees under the plans may be either incentive
stock options or nonqualified options. Only nonqualified options may be granted
to nonemployee directors.
F-18
<PAGE>
The following tables summarizes information about employee stock
options outstanding:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 641,813 $5.43 445,212 $5.12 656,775 $2.24
Options granted 732,000 0.41 532,751 5.80 449,500 6.96
Options exercised -- -- (54,719) 3.52 (316,875) 4.01
Options forfeited (537,063) 5.14 (281,431) 6.00 (344,188) 7.03
------- ------- -------
Outstanding at end of year 836,750 1.23 641,813 5.43 445,212 5.12
======= ======= =======
Options exercisable at end of
year 263,910 276,887 166,950
Weighted average fair value of
options granted during the
year $0.43 $4.02 $6.36
</TABLE>
The following tables summarizes information about employee stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Number of Weighted Number
outstanding at average Weighted exercisable at Weighted
December 31, remaining average December 31, average
Range of exercise prices 1998 contractual life exercise price 1998 exercise price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.25 to $0.35 402,000 9.72 years $0.26 93,000 $0.25
$0.46 to $0.63 278,000 9.55 years $0.60 59,000 $0.63
$2.76 to $3.38 43,375 0.75 years $3.18 43,375 $3.18
$4.13 to $5.94 101,375 4.19 years $5.38 62,535 $5.49
$6.38 to $7.88 12,000 8.06 years $6.51 6,000 $6.51
------- -------
$0.25 to $7.88 836,750 8.51 years $1.23 263,910 $2.20
======= =======
</TABLE>
F-19
<PAGE>
NOTE 9 - INCOME TAXES:
Deferred tax assets and liabilities are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Deferred tax liability:
Purchased technology $ - $ (124,000)
---------------- ---------------
Deferred tax assets:
Net operating loss carryforwards 16,655,000 15,826,000
Research and development costs 959,000 1,276,000
Depreciation and amortization 197,000 18,000
Inventory 561,000 497,000
Deferred revenue 1,161,000 202,000
Accruals 168,000 149,000
Other 603,000 679,000
---------------- ---------------
Total deferred tax assets 20,304,000 18,647,000
---------------- ---------------
Net deferred tax assets 20,304,000 18,523,000
Valuation allowance (20,304,000) (18,523,000)
---------------- ---------------
Deferred taxes $ - $ -
================ ===============
</TABLE>
The Company has recorded a valuation allowance amounting to the entire
net deferred tax asset balance due to its lack of a history of consistent
earnings, possible limitations on the use of carryforwards, and the expiration
of certain of the net operating loss carryforwards which gives rise to
uncertainty as to whether the net deferred tax asset is realizable.
In connection with the acquisition of Trimco, the Company acquired
$926,000 in deferred tax assets of which $626,000 was provided as a valuation
allowance. In June 1997, the $300,000 tax asset was realized. In the event that
the remaining tax benefits acquired in the Trimco acquisition are realized, such
benefits will be used first to reduce any remaining goodwill and other
intangible assets related to the acquisition. Once those assets are reduced to
zero, the benefit will be included as a reduction of the Company's income tax
provision.
No income tax expense was recognized in 1998, 1997 or 1996 as the
Company has net operating loss carryforwards of $42,000,000 and $9,429,000 for
federal and state tax purposes, respectively, which expire over the years 1999
through 2018. Net operating losses acquired in another acquisition are limited
to $8,000,000 offset against that entity's future taxable income, subject to an
approximate $500,000 annual limitation. In addition, if certain substantial
changes in the Company's ownership should occur, there would be a limitation on
the amount of the consolidated net operating loss carryforwards and tax credits
which can be utilized in any one year. The Company has investment and research
activity credit carryforwards aggregating $500,000, which will substantially
expire in the years 2000 through 2005.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
F-20
<PAGE>
services, geographic areas, and major customers. The Company implemented SFAS
No. 131 for the year ended December 31, 1998
The Company has one business segment which consists of the development
and sale of a suite of client/server document management software products. One
customer accounted for 12% of the Company's total revenues in 1996.
Revenues for 1998, 1997 and 1996 by customer location are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $ 7,977,000 $ 9,922,000 $ 12,778,000
Europe, primarily United Kingdom 4,337,000 6,599,000 5,450,000
Other International 489,000 1,252,000 1,321,000
----------- ------------- ------------
$12,803,000 $ 17,773,000 $ 19,549,000
=========== ============= ============
</TABLE>
Information by geographic location for the year ended December 31,
1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------------------------------------
CORPORATE
UNITED STATES EUROPE RESEARCH & DEVELOPMENT CONSOLIDATED
------------- ------ ---------------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 8,413,000 $ 4,390,000 - $12,803,000
Operating loss (3,133,000) (2,312,000) $(2,314,000) (7,759,000)
Identifiable assets 5,444,000 5,922,000 - 11,366,000
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------------------------------------------
CORPORATE
UNITED STATES EUROPE RESEARCH & DEVELOPMENT CONSOLIDATED
------------- ------ ---------------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 10,861,000 $ 6,912,000 - $17,773,000
Operating income (loss) (1,726,000) (2,494,000) $(4,155,000) (8,375,000)
Identifiable assets 7,784,000 8,052,000 - 15,836,000
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------------------------------------------
CORPORATE
UNITED STATES EUROPE RESEARCH & DEVELOPMENT CONSOLIDATED
------------- ------ ---------------------- -------------
<S> <C> <C> <C> <C>
Net sales $12,295,000 $7,254,000 - $19,549,000
Operating income (loss) 1,512,000 (571,000) $(3,363,000) (2,422,000)
Identifiable assets 10,113,000 8,147,000 - 18,260,000
</TABLE>
A majority of the Europe revenue, net sales and operating income (loss)
and all of the Europe identifiable assets are attributable to the United
Kingdom.
Research and development is performed both in the United States and
Europe for the benefit of the entire Company and has not been separately
allocated to geographic regions.
F-21
<PAGE>
NOTE 11 - COMMITMENTS:
The Company leases its principal facilities under a long-term operating
lease which expires in March 2001 and includes rent escalations of approximately
4% per annum. The Company also has a long-term operating lease for another
facility that includes rent escalations not to exceed 4% in any year. The
Company subleased this other facility in 1996 and recognized a loss for the
difference in the lease and sublease rate along with other costs associated with
the office closure. The lease and sublease both expire in April 2001. The
Company recognizes rental expense on a straight line basis over the term of the
leases.
The Company assumed leases for certain facilities leased by Trimco for
which no future benefit is anticipated. The accrual for unfavorable leases
assumed relates to a liability for the minimum lease payments less estimated
sublease rental income on these leases. In December 1997, the Company subleased
one of the facilities under a noncancellable agreement which ends in August 2006
for an amount equal to the Company's future obligation under the lease,
resulting in a $266,000 increase in other income.
The Company's United Kingdom subsidiary leases a facility for a term
through March 2001 with an option to extend the lease for an additional five
years. The Company also leases a facility in Florida under a lease which expires
in 2002. The Florida facility is subleased for an amount equal to the Company's
future obligation under the lease.
Future minimum lease payments at December 31, 1998 under operating
lease agreements, net of noncancellable sublease payments of approximately
$530,000, are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 420,000
2000 450,000
2001 310,000
2002 298,000
2003 298,000
Thereafter 671,000
-------
Total minimum lease payments $2,447,000
==========
</TABLE>
Rent expense under operating leases was $441,000, $717,000 and $779,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 12 - LITIGATION:
On March 3, 1999, ("the settlement date"), the Company entered into a
Memorandum of Understanding providing for the settlement of certain securities
class action lawsuits pending against the Company. The Memorandum of
Understanding provides that in exchange for the dismissal and release of all
claims in these cases, (a) the Company's insurance carrier will pay $2,500,000
to the class of plaintiffs, (b) the Company will issue to the plaintiffs
2,304,271 shares of its common stock, which is equal to twenty percent of the
sum of (i) the number of shares of common stock currently outstanding and (ii)
the maximum number of shares issuable upon conversion of the Series D
convertible Preferred Stock, and (c) the Company will cooperate with plaintiffs'
counsel by providing certain documents and information regarding the claims
asserted in the class actions. The settlement is subject to certain conditions,
including the execution of a stipulation of settlement, notice to the class and
approval by the court. The Company recorded expense of $1,128,000 in connection
with this settlement in 1998 based on the
F-22
<PAGE>
average closing market price the week preceding the settlement date times the
number of shares of the Company's common stock to be issued in the settlement.
In addition as a part of the settlement in these class actions, the
Company's former Chairman of the Board, President, and Chief Executive Officer,
Jay V. Tanna, has agreed to forego any claim for the unpaid compensation of
$131,000 under the Separation Agreement and Release of Claims that Mr. Tanna and
the Company entered into on April 1, 1998, and to surrender his 35,000 shares of
common stock in the Company. Mr. Tanna and the Company also have agreed to
execute a Settlement Agreement and Mutual Release resolving all claims and
disputes with one another, with the exception of certain existing
indemnification obligations under Altris' bylaws, California law, and the
indemnity agreement between the Company and Mr. Tanna related to his services as
a director and officer of the Company.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
F-23
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 246,000 $ 530,000
Receivables, net....................................................... 336,000 1,128,000
Inventory, net......................................................... 59,000 277,000
Other current assets................................................... 185,000 244,000
--------------- --------------------
Total current assets................................................ $ 826,000 $ 2,179,000
Property and equipment, net............................................... 495,000 1,565,000
Computer software, net.................................................... 3,974,000 4,685,000
Goodwill, net............................................................. 26,000 2,645,000
Other assets.............................................................. 227,000 292,000
Restricted cash........................................................... 200,000 -
--------------- --------------------
Total assets........................................................ $ 5,748,000 $ 11,366,000
=============== ====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................... $ 1,767,000 $ 2,779,000
Accrued liabilities.................................................... 1,504,000 1,934,000
Notes payable ......................................................... 599,000 745,000
Deferred revenue....................................................... 2,254,000 3,230,000
--------------- --------------------
Total current liabilities........................................... 6,124,000 8,688,000
Long term notes payable................................................... 203,000 468,000
Deferred revenue, long term portion....................................... 1,683,000 2,131,000
Other long term liabilities............................................... 1,376,000 1,263,000
Subordinated debt, net of discount........................................ 2,678,000 2,591,000
--------------- --------------------
Total liabilities................................................... 12,064,000 15,141,000
=============== ====================
Mandatorily redeemable Series D Convertible Preferred Stock, $1,000 par
value, 3,000 shares authorized; 3,000 shares Issued and outstanding
($3,560,000 total liquidation preference).............................. 3,318,000 3,003,000
Shareholders' deficit:
Common stock, no par value, 20,000,000 shares authorized;
11,620,663 and 9,614,663 issued and outstanding, respectively....... 62,689,000 61,201,000
Common stock warrants.................................................. 677,000 585,000
Accumulated other comprehensive income................................. - (10,000)
Accumulated deficit.................................................... (73,000,000) (68,554,000)
--------------- ---------------------
Total shareholders' deficit......................................... (9,634,000) (6,778,000)
---------------- ---------------------
Total liabilities and shareholders' deficit.................... $ 5,748,000 $ 11,366,000
=============== ====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-24
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the nine months
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 479,000 $ 770,000 $ 1,633,000 $ 3,313,000
Services and other 1,080,000 2,379,000 3,833,000 6,371,000
-------------- ------------- --------------- ---------------
Total revenues 1,559,000 3,149,000 5,466,000 9,684,000
-------------- ------------- --------------- ---------------
Cost of revenues:
Licenses 291,000 241,000 881,000 830,000
Services and other 669,000 1,406,000 2,471,000 4,706,000
-------------- ------------- --------------- ---------------
Total cost of revenues 960,000 1,647,000 3,352,000 5,536,000
-------------- ------------- --------------- ---------------
Gross profit 599,000 1,502,000 2,114,000 4,148,000
-------------- ------------- --------------- ---------------
Operating expenses:
Research and development 773,000 552,000 2,621,000 1,779,000
Marketing and sales 343,000 887,000 1,505,000 3,542,000
General and administrative 280,000 890,000 2,169,000 3,807,000
-------------- ------------- --------------- ---------------
Total operating expenses 1,396,000 2,329,000 6,295,000 9,128,000
-------------- ------------- --------------- ---------------
Loss from operations (797,000) (827,000) (4,181,000) (4,980,000)
Interest and other income 1,000 5,000 195,000 23,000
Interest and other expense (148,000) (160,000) (460,000) (492,000)
--------------- -------------- ---------------- ----------------
Net loss $ (944,000) $ (982,000) $ (4,446,000) $ (5,449,000)
============== ============= ============== ===============
Basic net loss per common share $ (.09) $ (.11) $ (.45) $ (.60)
============== ============= =============== ===============
Diluted net loss per common share $ (.09) $ (.11) $ (.45) $ (.60)
============== ============= =============== ===============
Shares used in computing basic and
diluted net loss per common share 11,618,000 9,615,000 10,635,000 9,615,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-25
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (4,446,000) $ (5,449,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,667,000 1,712,000
Loss on disposal of assets - 46,000
Gain on sale of 60% interest in ASL (182,000) -
Change in warrant exercise price 65,000 -
Warrants issued to consultant 27,000 -
Changes in assets and liabilities:
Receivables, net 533,000 1,597,000
Inventory 210,000 144,000
Other assets 106,000 339,000
Accounts payable (206,000) 33,000
Accrued liabilities 397,000 (527,000)
Deferred revenue (472,000) 3,853,000
Other long term liabilities (113,000) (60,000)
------------------- -----------------
Net cash (used in) provided by operating activities (2,188,000) 1,688,000
------------------ -----------------
Cash flows from investing activities:
Net proceeds from sale of 60% interest in ASL 130,000 -
Maturity of short term investment - 133,000
Purchases of property and equipment (12,000) (99,000)
Purchases of software - (158,000)
Computer software capitalized - (1,804,000)
------------------ -----------------
Net cash provided by (used in) investing activities 118,000 (1,928,000)
------------------ -----------------
Cash flows from financing activities:
Repayments under notes payable (327,000) (233,000)
Net borrowings under revolving loan and bank agreements - 787,000
Proceeds from Spescom convertible loan 300,000 -
Proceeds from sale of common stock 1,800,000 -
Payment of preferred stock dividends - (87,000)
Proceeds from exercise of stock options 3,000 -
------------------ -----------------
Net cash provided by financing activities 1,776,000 467,000
------------------ -----------------
Effect of exchange rate changes on cash 10,000 (107,000)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents (284,000) 120,000
Cash and cash equivalents at beginning of period 530,000 1,938,000
------------------ -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-26
<PAGE>
<S> <C> <C>
Cash and cash equivalents at end of period $ 246,000 $ 2,058,000
================== ================
Supplemental cash flow information:
Interest paid $ 307,000 $ 353,000
================== ================
Schedule of noncash financing activities:
Accretion of dividends on mandatorily redeemable
convertible preferred stock $ 315,000 $ 216,000
================== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-27
<PAGE>
NOTE 1 - LIQUIDITY AND CAPITAL RESOURCES
Altris Software, Inc. ("the Company") has suffered recurring losses,
and has an accumulated deficit of $73,000,000, a working capital deficit of
$5,298,000 and a deficit in shareholders' equity of $9,634,000 as of September
30, 1999, which raise substantial doubt about the Company's ability to continue
as a going concern. Due to significant losses and decreasing sales, the Company,
in 1998, reduced its payroll cost, its largest cost element. In addition, the
Company has made further reductions of other expenditures, and in the second
quarter of 1999 sold a 60% interest in its United Kingdom operations (see Notes
2 and 3). In the first half of 1999, the Company experienced a reduction in
incoming orders. The Company's ability to continue operations is dependent upon
the generation of new system sales of Altris EB in the near term, which cannot
be assured. Given the substantial uncertainties confronting the Company, there
can be no assurance that sufficient cash flows will be generated by the Company
in the near term to meet its current obligations. Accordingly, the Company is
investigating raising additional cash through debt or equity offerings or other
means. Management believes that such additional cash through the issuance of
debt or equity will be necessary to enable the Company to meet its short-term
needs for working capital. There can be no assurance that additional debt or
equity financing will be available, or that, if available, such financing could
be completed on commercially favorable terms. Failure to obtain additional
financing in the near future can be expected to have a material adverse affect
on the Company's business, results of operations, and financial condition.
NOTE 2 - BASIS OF PRESENTATION
The information contained in the following Condensed Notes to the
Consolidated Financial Statements is condensed from that which would appear in
the annual consolidated financial statements; accordingly, the consolidated
financial statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
Company's Form 10-K for the year ended December 31, 1998. It should be
understood that the accounting measurements at an interim date 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 consolidated balance sheet of the Company as of
September 30, 1999 and the consolidated statement of operations for the three
and nine months end September 1999 and 1998 and the consolidated statement of
cash flows for the nine month periods ended September 30, 1999 and 1998 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. The investment in Altris Software
Ltd. ("ASL"), a U.K. limited company, is accounted for under the equity method
at September 30,1999. As of September 30, 1999 the net book value of the
investment in ASL is zero (see Note 3). All significant intercompany balances
and transactions have been eliminated. The accompanying consolidated financial
statements include the results of ASL up to March 1, 1999.
NOTE 3 - SPESCOM TRANSACTION
In May 1999, the Company completed a transaction with Spescom Ltd., a
South African company publicly traded on the Johanesburg Exchange, whereby
Spescom invested $1.8 million for 2
F-28
<PAGE>
million shares of the Company's common stock. In addition, as part of the
agreement, Spescom paid the Company an additional $1.0 million and invested $1.2
million directly into ASL for a 60% ownership of ASL. In conjunction with the
agreements the Company contributed $400,000 into ASL and retained a 40% interest
in ASL. The Company also applied $200,000 of the proceeds from the transaction
to fund an escrow account which will remain in effect until the second
anniversary of the closing date for the purpose of securing any obligations owed
by the Company to Spescom under the agreement, including any liability the
Company may have under its representations and warranties to Spescom in the
agreement. The Company recorded a gain of $182,000, net of expenses on the
transaction. The Company also recorded a deferred gain of $200,000 relating to
the funds escrowed. The deferred gain will be realized to the extent such
escrowed funds are returned, if any, to the Company.
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 the
distribution agreement, the exclusivity is contingent on ASL meeting certain
minimum royalty commitments beginning in 2002. The agreement provides for a
royalty to the Company on sales of the Company's products by ASL equal to 50% of
the Company's list price for such products. ASL has also entered into a
distribution agreement with Spescom providing that ASL will be Spescom's
exclusive distributor covering the same territory for EMS 2000, Spescom's
configuration management (CM) product. In addition, the agreement provides that
the Company will become Spescom's exclusive distributor of EMS 2000 in North and
South America and the Caribbean.
In order for the Company to obtain consent to the agreement by the
investor holding the Company's subordinated debenture and the Company's Series D
Convertible Preferred Stock ("the Investor"), the interest rate on the
subordinated debenture was increased from 11.5% to 12% (see Note 6). In
addition, the conversion rate on the convertible preferred stock has been
adjusted from $6.00 per share of common stock to $1.90 and the exercise price on
warrants entitling the Investor to purchase 400,000 shares of the Company's
common stock was also adjusted from $6.00 to $1.90 per share. As a result of the
change in exercise price, the Company recorded an additional expense of $65,000
relating to the Spescom transaction.
Other terms of the transaction include that Spescom has the right to
appoint one representative on 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.
NOTE 4 - BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
RECEIVABLES, NET SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------- ------------------ -----------------
(Unaudited)
<S> <C> <C>
Billed receivables $ 354,000 $ 1,193,000
Unbilled receivables 69,000 129,000
Less allowance for doubtful accounts (87,000) (194,000)
---------------- -----------------
$ 336,000 $ 1,128,000
================ =================
OTHER LONG-TERM LIABILITIES
---------------------------
Accrued loss on office closure $ 36,000 $ 77,000
Settlement of lawsuits 1,128,000 1,128,000
F-29
<PAGE>
<S> <C> <C>
Deferred gain on Spescom transaction 200,000 -
Other 12,000 58,000
---------------- -----------------
$ 1,376,000 $ 1,263,000
================ =================
</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 September 30, 1999
and December 31, 1998, the Company had a reserve of $861,000 and $651,000,
respectively, to reduce the carrying amount of inventory to its estimated net
realizable value.
NOTE 6 - NOTES PAYABLE AND SUBORDINATED DEBT
Notes payable and subordinated debt consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-----------------------------------
(Unaudited)
<S> <C> <C>
Revolving loans $ 502,000 $ 838,000
Convertible loan 300,000 -
Subordinated debt, less discount of $351,000 and
$409,000, respectively 2,678,000 2,591,000
United Kingdom overdraft facility - 375,000
------------- -----------
$ 3,480,000 $ 3,804,000
============= ===========
</TABLE>
The Company has one revolving loan and security agreement, which
provided 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% (7.85% and 8.05% at September 30, 1999 and
December 31, 1998, respectively). At September 30, 1999, $502,000 was
outstanding under this agreement with no additional funds available. At December
31, 1998, $838,000 was outstanding. Total borrowings under the revolving loan
and security agreements are collateralized by the Company's assets. The
revolving loan and security agreement contain certain restrictive covenants
including the maintenance of a minimum ratio of debt to tangible net worth. As
of September 30, 1999, the Company was in violation of such covenants. 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 September 1999, the Company completed a loan transaction with
Spescom, whereby Spescom agreed to provide to the Company a loan of $500,000
bearing interest at 10% per annum with principal convertible at the option of
Spescom into common stock of the Company at $0.35 per share on or before January
1, 2000. If not converted, the loan is repayable on February 28, 2000. The first
$300,000 of this loan was received in September 1999 and the remaining $200,000
was received in October 1999.
F-30
<PAGE>
In June 1997, the Company issued a five-year, 11.5% subordinated
debenture with quarterly interest payments for gross proceeds of $3,000,000. In
conjunction with the debt, the Company granted warrants (the "Lender Warrants")
to purchase 300,000 shares of the Company's common stock at an exercise price of
$6.00 per share. The warrants are exercisable over a five-year period from the
date of issuance. A portion of the proceeds from the debt has been allocated to
common stock warrants, which were valued at $585,000. In the event the debt is
outstanding at June 2000, and each year thereafter, the Company will grant in
each year additional five-year warrants to purchase 50,000 shares of common
stock at an exercise price of $7.00 per share. A value has not been ascribed to
these contingent warrants. At such time that the warrants are no longer
contingent, a value, if any, will be ascribed. In November 1998, the company
entered into a Security Agreement with the Investor providing the Investor with
a second priority security interest in the inventory, accounts receivable,
general intangibles and certain other assets of the Company. The Investor's
security interest is subordinated to the first priority security interest of the
lender under the Company's revolving credit agreements. In May 1999, the Company
agreed to increase the interest rate on the subordinated debenture from 11.5% to
12% and reduce the exercise price on the Lender Warrants to $1.90 per share (see
Note 3).
In October 1998, ASL renewed an overdraft facility with a bank.
Interest is calculated at 3.0% per annum over the bank's base rate of 9.5% at
December 31, 1998. At December 31, 1998, $375,000 was outstanding under the
facility which was collateralized by the property and assets of ASL, including a
L100,000 certificate on deposit. As a result of the Spescom transaction, the
indebtedness on this facility is no longer included in the Company's
liabilities. In addition, the Company's guarantee in connection with the
facility has been assumed by Spescom.
NOTE 7 - CONVERTIBLE PREFERRED STOCK
In June 1997, the Company issued 3,000 shares of its Series D
Convertible Preferred Stock ("the Series D Preferred Stock") for gross proceeds
of $3,000,000. The Series D Preferred Stock bears a dividend of 11.5% per annum
and is convertible into the Company's common stock at a price of $6.00 per share
subject to reset, as defined in the preferred stock agreement. Since March 1998
the Company has been in default of certain covenants under the Preferred Stock
Agreement, resulting in a dividend rate increase to 14% per annum. In addition,
if the Company fails to pay dividends on six consecutive dividend payment dates,
or the aggregate amount of unpaid dividends equals or exceeds $172.50 per share,
then the Investor shall be entitled to nominate an additional director to the
Company's board. In May 1999, the Company agreed to reduce the conversion price
on the Series D Preferred Stock to $1.90 per share (see Note 3).
The Company may redeem the Series D Convertible Preferred Stock at its
option after June 1999 if an average trading price for the common stock equals
or exceeds $9.50 per share or after June 2002, irrespective of the trading
price. The Series D Preferred Stock redemption price per share is equal to the
sum of $1,000, plus all accrued and unpaid dividends and interest on such unpaid
dividends at an annual rate of 11.5% (increased to 14% as a result of the event
of default). If the number of shares issuable upon conversion of the Series D
Preferred Stock, when added to all other shares of common stock issued upon
conversion of the Series D Preferred Stock and any shares of common stock issued
or issuable upon the exercise of the warrants would exceed 1,906,692 shares of
common stock (the "Issuable Maximum"), then the Company shall be obligated to
effect the conversion of only such portion of the Series D Preferred Stock
resulting in the issuance of shares of common stock up to the Issuable Maximum,
and the remaining portion of the Series D Preferred Stock shall be redeemed by
the Company for cash in accordance with the procedures set forth in the
Certificate of Determination. In the event of mandatory redemption, when the
number of shares exceeds the Issuable Maximum, the redemption price per share is
F-31
<PAGE>
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) on June 27, 2000 for 50,000 shares, at an exercise
price of $7.00 per share, if the Series D Preferred Stock has not been redeemed
or converted in full on or prior to June 27, 2000 (the "2000 Contingent
Warrant") (ii) on June 27, 2001 for 50,000 shares, at an exercise price of $7.00
per share, if the Series D Preferred Stock has not been redeemed or converted in
full on or prior to June 27, 2001 (the "2001 Contingent Warrant"); (iii) on July
17, 2002 for 250,000 shares, at an exercise price equal to the trading price per
share on the issuance date of the warrant, if the Series D Preferred Stock has
not been redeemed or converted in full on or prior to July 17, 2002; and (iv) on
June 27, 2003 for 250,000 shares, at an exercise price equal to the trading
price per share on the issuance date of the warrant, if the Series D Preferred
Stock has not been redeemed or converted in full on or prior to June 27, 2003.
Such warrants are exercisable over a five-year period from the date of grant. A
value has not been ascribed to these contingent warrants. At such time that the
warrants are no longer contingent, a value will be ascribed, if any. In
connection with the debt (see Note 6) 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. In May 1999, the Company agreed to reduce the exercise
price of the 2000 Contingent Warrant and 2001 Contingent Warrant to $1.90 per
share (see Note 3).
Each share of Series D Preferred Stock is entitled to one vote on all
matters submitted to the holders of the common stock. In the event of
liquidation of the Company, the Series D Preferred Stockholders will receive in
preference to the common stockholders an amount equal to $1,000 per share plus
accrued but unpaid dividends and interest on all such dividends at an annual
rate of 11.5% (increased to 14% as a result of the event of default). In 1998,
dividends of $87,000 were paid on the Series D Preferred Stock and as of
September 30, 1999 accumulated unpaid dividends amounted to $665,000.
NOTE 8 - 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 For the nine months
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss Used:
Net loss $ (944,000) $ (982,000) $ (4,446,000) $ (5,449,000)
Accretion of dividends on
mandatorily redeemable
convertible preferred stock (105,000) (105,000) (315,000) (303,000)
------------- ---------------- ------------------- ----------------
F-32
<PAGE>
<S> <C> <C> <C> <C>
Net loss used in computing
basic and diluted net loss
per share $(1,049,000) $ (1,087,000) $ (4,761,000) $ (5,752,000)
=========== ================ ================== ================
Shares Used:
Weighted average common
shares outstanding used in
computing basic and diluted
net loss per common share 11,618,000 9,615,000 10,635,000 9,615,000
========== ========= ========== =========
</TABLE>
NOTE 9 - 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. No
customer accounted for over 10% of the Company's total revenues for the three
and nine months ended September 30, 1999.
Revenues for the three and nine months ended September 30, 1999 and
1998 by customer location are as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 1,407,000 $ 1,844,000 $ 4,467,000 $ 5,940,000
Europe, primarily United Kingdom 54,000 1,051,000 797,000 3,502,000
Other International 98,000 254,000 202,000 242,000
------------- ------------- ------------- --------------
$ 1,559,000 $ 3,149,000 $ 5,466,000 $ 9,684,000
============= ============= ============= ==============
</TABLE>
F-33
<PAGE>
Information by geographic location for the three and nine months ended
September 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three months ended September 30, 1999
--------------------------------------------------------------------------------
United Corporate
States Europe Research & Development
-------------- ------------- ------------------------------------------
Consolidated
- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,559,000 $ - $ - $1,559,000
Operating loss (24,000) - (773,000) (797,000)
Identifiable assets 5,748,000 - - 5,748,000
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
--------------------------------------------------------------------------------
United Corporate
States Europe Research & Development
-------------- ------------- ------------------------------------------
Consolidated
- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,844,000 $ 1,305,000 $ - $3,149,000
Operating Income (loss) 92,000 (183,000) (552,000) (827,000)
Identifiable assets 8,639,000 5,494,000 - 14,134,000
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
--------------------------------------------------------------------------------
United Corporate
States Europe Research & Development
-------------- ------------- ------------------------------------------
Consolidated
- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,360,000 $ 1,106,000 $ - $5,466,000
Operating loss (1,229,000) (331,000) (2,621,000) (4,181,000)
Identifiable assets 5,748,000 - 5,748,000
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
--------------------------------------------------------------------------------
United Corporate
States Europe Research & Development
-------------- ------------- ------------------------------------------
Consolidated
- ------------
<S> <C> <C> <C> <C>
Net sales $ 5,940,000 $3,744,000 $ - $9,684,000
Operating loss (2,241,000) (960,000) (1,779,000) (4,980,000)
Identifiable assets 8,639,000 5,494,000 - 14,134,000
</TABLE>
A majority of the European revenue, net sales and operating loss and
all of the European identifiable assets are attributable to ASL operations prior
to the Spescom transaction (see Notes 2 and 3).
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 10 - LITIGATION
F-34
<PAGE>
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 D 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.
F-35
<PAGE>
SPESCOM LIMITED
RESULTS FOR THE YEAR TO SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 12 MONTHS FOR THE 12 MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Turnover $82,654 $66,102
----------------------------------------------------
Operating income 9,157 7,209
Net finance income (383) (378)
Dividends received 97 380
----------------------------------------------------
Net income before abnormal item 8,871 7,211
Goodwill amortized (2,070) --
Abnormal item (492) (4,522)
----------------------------------------------------
Net income before taxation 6,309 2,689
Taxation (1,457) (1,349)
----------------------------------------------------
Net income after taxation 4,852 1,340
Associated company (522) (166)
----------------------------------------------------
Net income of the group 4,330 1,174
Attributable to outside shareholders of subsidiaries (85) (151)
----------------------------------------------------
Retained income for the period 4,245 1,023
====================================================
Headline earnings 6,807 5,544
====================================================
HEADLINE EARNINGS PER SHARE (CENTS) 13.3 12.3
====================================================
</TABLE>
- ---------------------------
NOTES
1. Abnormal item involves an investment in a Brazilian partnership written off
in the amount of $492,000.
2. Headline earnings is based on retained income for the period but before
abnormal items and goodwill amortized. Headline earnings per share is based
on 51,020,456 weighted average shares outstanding for the 1999 period and
42,113,694 shares for the 1998 period.
3. The figures that appear in this statement have been converted from South
African Rand to U.S. Dollars using an average rate of .16588 and .19097
U.S. Dollars per South African Rand for the years ending September 30, 1999
and September 30, 1998, respectively.
F-36
<PAGE>
SPESCOM LIMITED
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT SEPTEMBER 30,
1999 1998
------------------------------------------------
------------------------------------------------
<S> <C> <C>
EMPLOYMENT AT CAPITAL
Fixed assets $8,349 $6,236
Goodwill 7,042 2,383
Investments and loans 11,318 9,855
Deferred taxation 52 188
Cash investments 10,525 12,860
Net current assets 9,288 2,880
------------------------------------------------
46,574 34,402
------------------------------------------------
CAPITAL EMPLOYED
Share capital 32,267 21,605
Non distributable reserves 3 --
Distributable reserves 8,499 4,897
------------------------------------------------
Interest of holding company shareholders 40,769 26,502
Outside shareholders at subsidiary companies 271 438
Interest of all shareholders 41,040 26,940
Deferred taxation 173 515
Interest free liabilities 1,018 1,211
Interest bearing liabilities 4,343 5,738
------------------------------------------------
46,574 34,404
================================================
Net asset value per share (cents) 76 56
================================================
</TABLE>
- -------------------------
NOTES
1. The figures that appear in this statement have been converted from South
African Rand to U.S. Dollars using an average rate of .16588 and .19097
U.S. Dollars per South African Rand for the years ending September 30, 1999
and September 30, 1998, respectively.
F-37
<PAGE>
SPESCOM LIMITED
ABRIDGED CASH FLOW STATEMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 12 MONTHS FOR THE 12 MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Cash generated by operations $10,032 $ 7,515
Working capital changes (8,000) (3,123)
---------------------------------------------------
Cash generated by operating activities 2,032 4,392
Net finance costs (286) 1
Taxation paid (1,932) (190)
---------------------------------------------------
(186) 4,203
Dividends paid -- (282)
---------------------------------------------------
Net cash flows from operating activities (186) 3,921
---------------------------------------------------
INVESTING ACTIVITIES
Replacement of fixed assets (2,045) 240
Investments to expand operations - subsidiary,
affiliated and joint venture companies (8,041) (7,068)
---------------------------------------------------
(10,086) (6,828)
---------------------------------------------------
FINANCING ACTIVITIES
Proceeds of share capital issues 9,918 5,842
Bank finance, facilities and other loans (1,403) 103
---------------------------------------------------
8,515 5,945
---------------------------------------------------
CASH AND CASH EQUIVALENTS
Net change in the year (1,757) 3,038
At beginning of year 12,860 9,822
Acquired with business interests 1,081 --
Translation Adjustment (1,659) --
===================================================
At end of year 10,525 12,860
===================================================
</TABLE>
- -------------------------
NOTES
1. The figures that appear in this statement have been converted from South
African Rand to U.S. Dollars using an average rate of .16588 and .19097
U.S. Dollars per South African Rand for the years ending September 30, 1999
and September 30, 1998, respectively.
F-38
<PAGE>
TURNOVER AND HEADLINE EARNINGS PER SHARE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED
SEPTEMBER 30, TURNOVER ($ IN MILLION) EARNINGS PER SHARE (CENTS)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 $ 32 9
------------------------------------------------------------------------------------------------------
1996(1) 30 8
------------------------------------------------------------------------------------------------------
1997 42 10
------------------------------------------------------------------------------------------------------
1998 66 12
------------------------------------------------------------------------------------------------------
1999 83 13
------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
1. Consists of a 17-month period.
DIVISIONAL CONTRIBUTION TO REVENUE
<TABLE>
<CAPTION>
Division Contribution (as percentage of revenue)
-------- ---------------------------------------
<S> <C>
Communications Network Division 52%
Business Enterprise Solutions Division 42%
Services 6%
</TABLE>
<TABLE>
<CAPTION>
LOCAL SALES VS. INTERNATIONAL SALES
Contribution (as percentage of revenue)
---------------------------------------
<S> <C>
Local 84%
International 16%
</TABLE>
CONTRIBUTION BY CUSTOMER TO REVENUE
<TABLE>
<CAPTION>
Customer Contribution (as percentage of revenue)
-------- ---------------------------------------
<S> <C>
Network Operators 39%
Corporates 32%
Utilities 14%
Government 14%
Other 1%
</TABLE>
F-39
<PAGE>
REVIEW OF OPERATIONS
Although 1999 was a turbulent year for the IT industry, Spescom
Limited, celebrating its 22nd year in business, posted a 41.4% increase in
headline earnings and a 25.2% increase in headline earnings per share, for the
year ended September.
This is not the first time Spescom has produced excellent results. We
were recently named one of only six "Royal Companies" by Business Times, for
having earned a place in the top 20 of the top 100 South African companies for
the third consecutive year. According to the same survey, the group has provided
a compound return of 34.4% per annum for shareholders over a 5-year period.
During the period under review, group turnover rose 44% to R498.3
($82.7) million and operating income 46.2% to R55.2 ($9.2) million. The group's
operating margin was 11.1% (1998: 10.9%). The weighted average number of shares
in issue increased by 12.9%, resulting in an increase of headline earnings per
share of 25.2% to 80.4 cents ($0.133).
Although growth in earnings for the year was largely organic, we
concluded two major acquisitions. The group purchased 60% of Altris Software
Limited (UK) and a 14% strategic stake in Altris Software Inc (USA), as part of
our globalisation drive into the Knowledge Management market. We also increased
our shareholding in DataFusion Systems from 50% to 100%. The contribution from
the DataFusion acquisition, although disappointing in the first six months of
the year, improved during the latter half, but not enough to materially impact
on our results.
There was no significant earnings contribution from either of these two
acquisitions. This must however, not detract from the importance that we place
on both these transactions, which are pivotal to both our local organic growth
strategy and international expansion plans. Although the acquisitions were
mainly cash transactions we were still able to end the year with R63.4 ($10.5)
million in the bank.
The major contributor to revenue, at 52%, came from the Communications
and Networks Division, followed by the Business Enterprise Solutions Division at
42% and Services at 6%. Some of our larger customers were somewhat hesitant and
uncertain this year, particularly in the latter part, due to Y2K phobia.
We are pleased to report that despite Telkom's erratic spending
patterns, particularly in the access network arena, Spescom continued to be high
on its priority list which resulted in a dramatic recovery towards the end of
our financial year. Accordingly we had unusually high sales for the last month.
Our broadcast division also achieved some substantial transactions in the final
month of trading. The net result has been an abnormally high build-up of current
assets at year-end. Although we prefer a more balanced and smoother build-up of
sales, we are nevertheless content that the tempo of business increased, albeit
late in the year. We are pleased to report that most debts have been collected,
since year-end, which further improved the group's cash position.
Our international Revenue Management activities gained impetus with
secured projects in Zanzibar, Lesotho, Gambia, Argentina, Papua New Guinea, the
Comores and the Asia Pacific region.
Revenue from international operations is poised to improve
substantially over the next three years and this year contributed 16% of total
revenues.
F-40
<PAGE>
PROSPECTS
We have set ourselves the target of deriving 50% of earnings from our
international businesses by September 2002.
OUR VISION IS:
To become a major player in Knowledge Management (KMS) with specific
focus on Electronic Document Management (EDM).
- To capture a meaningful share of the Voice Transaction
Management (VTM) market.
- To expand Revenue Management into first world applications
through vending on the Internet.
- To increase our contributions from transaction-based revenue
activities.
- To increase market share in South Africa by capitalizing on
Telkom's expansion plans, taking advantage of the deregulated
environment end maximizing opportunities in the call-centre
and CTI arena. We have seen increased activity in the mid-size
business range, and are putting together a competitive product
offering, which includes Customer Relationship Management
(CRM) solutions.
- To achieve a minimum target of 5% of world market share in our
selected areas by acquiring key channels to markets.
- To continue forming alliances with world leaders as well as
developing our own proprietary technologies. The latter we see
as the main differentiator to becoming a world player.
- To address world markets indirectly and to establish a
multiplier effect, proprietary intellectual property together
with skills as a way forward. In these select areas we do not
want to be dependent on third parties and, consequently,
territorially bound.
This is our way forward into the new millennium, and it presents us the
must exciting opportunities yet as a Group.
DIVIDEND
Spescom is continuing with its policy of not declaring a dividend
thereby conserving its cash, which will be used for developing international
activities and financing growth in the Communications and Information Technology
(CIT) sector.
YEAR 2000 (Y2K) COMPLIANCE
In 1998, Spescom initiated a formal programme to address the Year 2000
issues. The process was completed in September 1999. All internal and external
mission critical issues were identified and corrective action was taken. We are
satisfied that the group is fully Y2K compliant. The associated costs were not
material and have been expensed.
F-41
<PAGE>
EMPLOYMENT EQUITY
The group embraced the Employment Equity legislation as an opportunity
to formalise its multifaceted black employment strategy. A committee comprising
elected representatives has finalised a three-year plan, which is in the process
of being implemented.
In the year under review SARHWU (South African Railway and Harbour
Workers Union) Investment Holdings increased its holding in Spescom 15 per cent
from six per cent, entitling it to representation on our board. The issue of new
shares brought in R60.2 ($10.0) million in cash.
Spescom Temoso, our most recent black empowerment initiative, was
awarded part of the prestigious multi-million rand GT11 contact to supply the
Gauteng Provincial Government (GPG) with IT solutions for the next two years.
CAUTIONARY ANNOUNCEMENT
Shareholders are reminded of the cautionary announcement issued
recently, which could have an effect on the Spescom share price. Negotiations
are at an advanced stage and shareholders are reminded to exercise caution when
dealing in their Spescom shares.
CORPORATE GOVERNANCE
Spescom is committed to the principles of openness, integrity and
accountability, embodied in the King report on Corporate Governance, and the
directors are satisfied that the group has complied with the key principles
contained in the report.
THANKS
We extend sincere thanks to our staff who have worked many extra hours
and who have gone further than the extra mile this year to achieve our
objectives and excellent results. The continued success of our group is
dependent on their dedication and the understanding and support of their
families.
ON BEHALF OF THE BOARD
A FARAH PNJ VERWER V LEAS
Chairman Chief Executive Officer Financial Director
Johanesburg, 19 November 1999
DIRECTORS: A Farah, KW Baker, VJ Crone, H J Isaacman,
LA Kallmeyer, CH Mostert, SP Ndlovu, V Leas, PNJ
Verwer, I Skosana, S Mabaso (alternate)
REGISTERED OFFICE: Spescom Park, Cnr Alexandra Avenue & Second Road,
Halfway House, 1685, Midrand. Tel: +27 (11)
266 1500, Web site: www.spescom.com
TRANSFER SECRETARIES: Mercantile Registrars Limited, 11 Diagonal Street,
Johanesburg, 2001. Tel: +27 (11) 370 5000.
F-42
<PAGE>
ANNEX A
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), is entered into as of
January 14, 2000, by and between Altris Software, Inc., a California corporation
(the "Company") and Spescom Limited, a corporation organized under the laws of
South Africa ("Spescom"), who agree as follows:
RECITALS
A. On December 9, 1999, Spescom acquired the following
outstanding securities of the Company from Finova Mezzanine Capital, Inc.
("Finova"):
(1) the Company's 11.5% Subordinated Debenture in the
principal amount of $3,000,000 issued as of June 27, 1997, as amended
by the First Amendment to Debenture Purchase Agreement dated November
1, 1998 and the Second Amendment to Debenture Purchase Agreement dated
May 7, 1999 (collectively, the "Debenture"); and
(2) 3,000 shares of Series E Convertible Preferred Stock of
the Company (the "Preferred Stock").
B. Spescom is the owner of the technology described on the
attached SCHEDULE A (the "EMS 2000 Technology"). The Company desires to acquire
the EMS 2000 Technology from Spescom.
C. Spescom currently owns 60% of the outstanding capital stock of
Altris Software Limited, a corporation incorporated under the laws of the United
Kingdom ("Altris UK"). The Company, indirectly through its Subsidiaries, owns
the remaining 40% of the capital stock of Altris UK. Subject to the terms and
conditions set forth herein, Spescom desires to acquire all of the Company's
interests in Altris UK.D. In September 1999, Spescom loaned $500,000 to the
Company (the "Loan"). Under the terms of the Loan, the principal of the Loan is
convertible at the option of Spescom into Common Stock of the Company on or
before January 1, 2000 at $0.35 per share.
E. In November 1999, Spescom loaned $100,000 to the Company under
the terms of a promissory note (the "Note") attached as EXHIBIT A.
F. Subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to Spescom, and Spescom desires
to purchase from the Company, an aggregate of 16,242,381 shares of the Company's
Common Stock (the "Shares") on the terms set forth in this Agreement.
AGREEMENT
1. DEFINITIONS. For purposes of this Agreement, the following definitions
shall apply:
1.1. The term "Affiliate" of a Person means any Person which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with such Person.
1.2. The term "Annual Plan" has the meaning set forth in
Section 9.3.12.
1.3. The term "Closing" has the meaning set forth in Section
3.1.
A-1
<PAGE>
1.4. The term "Closing Date" has the meaning set forth in
Section 3.1.
1.5. The term "control" (including the terms "controlling,"
"controlled by" and "under common control") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting stock, by
contract, or otherwise.
1.6. The term "Damages" has the meaning set forth in Section
10.1.
1.7. The term "Employment Agreement" has the meaning set forth
in Section 7.8.
1.8. The term "Encumbrance" means any charge, claim, community
property interest, condition, equitable interest, lien, option, pledge, security
interest, right of first refusal, or restriction of any kind, including any
restriction on use, voting, transfer, receipt of income, or exercise of any
other attribute of ownership.
1.9. The term "ERISA" has the meaning set forth in Section
4.27.
1.10. The term "Escrow Funds" has the meaning set forth in
Section 2.1.6.
1.11. The term "Exchange Act" has the meaning set forth in
Section 4.8.
1.12. The term "Finova Instruments" shall mean the following
documents: (a) the Convertible Preferred Stock Purchase Agreement, dated as of
June 27, 1997, by and between the Company and Finova (the "Convertible Preferred
Stock Purchase Agreement"); (b) the First Amendment to Convertible Preferred
Stock Purchase Agreement, dated as of May 7, 1999, by and between the Company
and Finova (the "First Amendment to Convertible Preferred Stock Purchase
Agreement"); (c) the Debenture Purchase Agreement, dated as of June 27, 1997, by
and between the Company and Finova (the "Debenture Purchase Agreement"); (d) the
Registration Rights Agreement, dated as of June 27, 1997, by and between the
Company and Finova (the "Finova Registration Rights Agreement"); (e) the First
Amendment to Debenture Purchase Agreement, dated as of November 1, 1998, by and
between the Company and Finova (the "First Amendment to Debenture Purchase
Agreement"); (f) the Security Agreement, dated as of January 22, 1999, by and
between the Company and Finova (the "Security Agreement"); (g) the Second
Amendment to Debenture Purchase Agreement dated, May 7, 1999, by and between the
Company and Finova (the "Second Amendment to Debenture Purchase Agreement"); (h)
the Stock Purchase Warrant dated June 27, 1997, executed by the Company and
Finova, as amended; (i) the Debenture; and (j) the Preferred Stock.
1.13. The term "GAAP" has the meaning set forth in Section
4.7.
1.14. The term "Indemnified Persons" has the meaning set forth
in Section 10.1.
1.15. The term "Material Adverse Event" means any event or
circumstance, or set of events or circumstances, individually or collectively,
that reasonably could be expected to result in any (i) material adverse effect
upon the validity or enforceability of any of the Operative Documents, or (ii)
material and adverse effect on the financial condition of the Company as
represented to Spescom herein or in any document delivered to Spescom in
connection herewith.
1.16. The term "Notice" has the meaning set forth in Section
11.9.
1.17. The term "Operative Documents" has the meaning set forth
in Section 4.1.1.
A-2
<PAGE>
1.18. The term "PBGC" has the meaning set forth in Section
4.27.
1.19. The term "parties" means the Company and Spescom
collectively.
1.20. The term "Person" means an individual, partnership,
corporation, limited liability company, trust or unincorporated organization,
and a government or agency or political subdivision thereof.
1.21. The term "Proceeding" has the meaning set forth in
Section 11.4.
1.22. The term "Purchase Price" has the meaning set forth in
Section 2.1.1.
1.23. The term "Registration Rights Agreement" has the meaning
set forth in Section 3.2.4.
1.24. The term "Reserve Bank Approval" has the meaning set
forth in Section 5.6.
1.25. The term "SEC" has the meaning set forth in Section 4.5.
1.26. The term "SEC Reports" has the meaning set forth in
Section 4.8.
1.27. The term "Securities Act" has the meaning set forth in
Section 4.5.
1.28. The term "Spescom" shall mean Spescom Limited and/or
another entity designated by Spescom in writing and approved in accordance with
Section 3.4 below.
1.29. The term "Spescom Nominee" has the meaning set forth in
Section 9.1.
1.30. The terms "Subsidiary" or "Subsidiaries" have the
meaning set forth in Section 4.1.2.
1.31. The term "Technology Transfer Agreement" has the meaning
set forth in Section 3.2.3. 1.32. The term "Third Party Beneficiary" has the
meaning set forth in Section 11.12.
1.33. The term "Transactions" has the meaning set forth in
Section 2.1.
2. TRANSACTIONS. Subject to the terms and conditions set forth in this
Agreement:
2.1. PURCHASE AND SALE OF SHARES. On the Closing Date (as defined
below), the Company will sell and issue to Spescom, and Spescom will purchase
from the Company, the Shares and the parties will consummate the other
transactions (collectively, the "Transactions") described in this Agreement for
the following consideration:
2.1.1. The Company will issue 5,285,714 Shares to Spescom at a
subscription price of $0.70 per share, for a total of $3,700,000 payable in cash
at the Closing (as defined below) (the "Purchase Price").
2.1.2. The Company will issue 9,528,096 Shares to Spescom in
exchange for delivery to the Company of the Debenture and the Preferred Stock
(including any right to accrued interest and dividends).
A-3
<PAGE>
2.1.3. The Company will pay Spescom the sum of $200,000
payable in cash at the Closing for transfer of the EMS 2000 Technology to the
Company.2.1.4. The Company shall pay the Note out of the proceeds of the
Purchase Price or if the Transactions are not approved in accordance with
Section 6.3 below by April 15, 2000, Spescom shall have the option to convert
all amounts then due under the Note into Shares in the Company Common Stock at a
price of $0.70 per share.
2.1.5. The Company will cause all of the shares in the capital
stock of Altris UK held by the Company or its Subsidiary ("Altris UK Shares") to
be transferred to Spescom free and clear of all Encumbrances.
2.1.6. Spescom will release to the Company the sum of $200,000
held in escrow pursuant to Section 5.3 of that certain Agreement dated May 7,
1999 between Spescom, Spescom CIT (Pty) Limited, the Company, Altris
International Limited, Altris Group Plc and Altris UK (the "Escrow Funds") (the
"May 1999 Agreement").
3. CLOSING.
3.1. The consummation of the Transactions shall take place at
the offices of Solomon Ward Seidenwurm & Smith, LLP, 401 B Street, Suite 1200,
San Diego, California as soon thereafter as all the conditions set forth in this
Agreement have been satisfied or waived, or such other time as the parties may
agree, but in no event later than April 15, 2000 (which time and place are
designated herein as the "Closing" and the date thereof as the "Closing
Date").3.2. At the Closing, the Company shall deliver the following to Spescom:
3.2.1. certificates representing the Shares;
3.2.2. the certificates and legal opinions referred to in
Section 7 of this Agreement;
3.2.3. a duly executed copy of the Technology Transfer
Agreement, in substantially the form attached to this Agreement as EXHIBIT B
(the "Technology Transfer Agreement");
3.2.4. a duly executed copy of the Registration Rights
Agreement in the form attached to this Agreement as EXHIBIT C (the "Registration
Rights Agreement");
3.2.5. a certified check or other credit acceptable to Spescom
in the amount of $200,000 pursuant to Section 2.1.3 of this Agreement; and
3.2.6. a certified check or other credit acceptable to
Spescom in an amount necessary to pay the Note in full.
3.2.7. certificates representing the Altris UK Shares, duly
endorsed in favor of Spescom, or other documentation acceptable to Spescom
evidencing the transfer of the Altris UK Shares to Spescom.
3.3. At the Closing, Spescom will deliver the following to the Company:
3.3.1. the Purchase Price, payable by certified check payable
to the Company or by wire transfer of immediately available funds to such
account as the Company may designate in writing to Spescom;
3.3.2. the original Debenture;
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3.3.3. the original stock certificates for the Preferred
Stock;
3.3.4. a duly executed copy of the Technology Transfer
Agreement;
3.3.5. a duly executed copy of the Registration Rights
Agreement; and
3.3.6. the Note endorsed by Spescom as canceled.
3.4. Spescom may designate in writing another entity to acquire some or
all of Spescom's rights under this Agreement providing that if such designee is
not an Affiliate of Spescom then such designation shall require Altris' approval
which shall not be unreasonably withheld. Spescom will remain liable for its
obligations under this Agreement notwithstanding any designation or assignment
under this Section.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Spescom that the following are true and accurate as of the date
of this Agreement. Except as may be set forth in the Disclosure Schedule
attached hereto:
4.1. CORPORATE STATUS.
4.1.1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and has
the corporate power to own and operate its properties, to carry on its business
as now conducted and to enter into and to perform its obligations under this
Agreement, and any other document executed and delivered by the Company in
connection with this Agreement (collectively, the "Operative Documents"). The
Company is qualified to do business and is in good standing in each state or
other jurisdiction in which such qualification is necessary under applicable
law, except where the failure to so qualify would not cause a Material Adverse
Event.
4.1.2. SCHEDULE 4.1.2 sets forth a complete list of each
corporation, partnership, joint venture, limited liability company or other
business organization in which the Company owns, directly or indirectly, any
capital stock or other equity interest (the "Subsidiary" or, collectively, the
"Subsidiaries"), or with respect to which the Company or any Subsidiary, alone
or in combination with others, is in a control position, which list shows the
jurisdiction of incorporation or other organization, and, if the Company does
not directly or indirectly own 100% of the outstanding equity interests in the
entities so listed on SCHEDULE 4.1.2, the percentage interest so owned by the
Company or any Subsidiary. Altris UK shall not be regarded as a Subsidiary for
the purpose of this Agreement. Each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction of
incorporation or other organization as indicated on SCHEDULE 4.1.2, each has all
requisite power and authority and holds all material licenses, permits and other
required authorizations from government authorities necessary to own its
properties and assets and to conduct its business as now being conducted, and
each is qualified to do business as a foreign corporation (or business
organization) and is in good standing in every jurisdiction in which such
qualification is necessary under applicable law, except where the failure to so
qualify would not cause a Material Adverse Event. All of the outstanding shares
of capital stock, or other equity interest, of each Subsidiary owned, directly
or indirectly, by the Company have been validly issued, are fully paid and
nonassessable, and are owned by the Company free and clear of all liens,
charges, security interests, or encumbrances.
4.2. CAPITALIZATION.4.2.1. The authorized capital stock of the Company
consists of (i) 1,000,000 shares of Preferred Stock, of which 3,000 shares of
Series E Preferred Stock are issued and outstanding, and (ii) 30,000,000 shares
of Common Stock, of which 13,101,734 shares are issued and outstanding. All
shares of Common Stock outstanding have been validly issued and are fully paid
and nonassessable. There are no statutory or contractual preemptive rights,
rights of first refusal, antidilution rights, or any
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similar rights held by any party with respect to the issuance of Shares, except
as set forth in the Finova Instruments, the May 1999 Agreement and Section 4.2.2
below.
4.2.2. The Company has not granted, or agreed to grant or
issue, any options, warrants or rights to purchase or acquire from the Company
any shares of capital stock of the Company, there are no securities outstanding
or committed to be issued by the Company or any Subsidiary which are convertible
into or exchangeable for any shares of capital stock or other securities of the
Company, and there are no contracts, commitments, agreements, understandings,
arrangements or restrictions as to which the Company is a party, or by which it
is bound, requiring or restricting the issuance of any shares of capital stock
or other securities of the Company, whether or not outstanding except for (i)
the Finova Instruments, (ii) the Initial Warrants and the Additional Warrants
issued pursuant to the Finova Instruments, (iii) options to purchase an
aggregate of 83,500 shares of the Company's Common Stock outstanding under its
1987 Stock Option Plan, (iv) options to purchase an aggregate of 1,086,750
shares of the Company's Common Stock outstanding under its Amended and Restated
1996 Stock Incentive Plan, (v) 2,304,271 shares of the Company's Common Stock to
be issued pursuant to the settlement of certain securities class action lawsuits
against the Company approved by the United States District Court for the
Southern District of California on July 30, 1999, (vi) shares of the Company's
Common Stock to Broadmark as consideration for certain advice rendered by
Broadmark in connection with the Transactions, and (vii) the Note. All such
shares have been duly reserved for issuance, have been duly and validly
authorized, and upon issuance in accordance with the terms of the respective
instruments and receipt of payment therefor, will be validly issued, fully paid,
and nonassessable.
4.2.3. The Shares that are being purchased by Spescom, when
issued, sold, and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid,
and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under applicable state and federal securities laws.
4.2.4. The Company is the lawful owner and holder of the
Altris UK Shares it owned as of the May 1999 Agreement, free and clear of all
Encumbrances except for a lien over all of the Company's assets in favor of
Merrill Lynch Business Financial Services, Inc.
4.3. AUTHORIZATION. The Company has full legal right, power and
authority to enter into and perform its obligations under this Agreement and the
Operative Documents without the consent or approval of any other person, firm,
governmental agency, or other legal entity, except as contemplated hereby or
thereby. The execution and delivery of this Agreement, the issuance of the
Shares hereunder, the delivery of the Altris UK Shares, the execution and
delivery of each other document in connection herewith or therewith to which the
Company is a party, and the performance by the Company of its obligations
hereunder or thereunder are within the corporate powers of the Company and have
been duly authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required, and do not
and will not contravene or conflict with (i) the Articles of Incorporation or
Bylaws of the Company, (ii) except to the extent of the required consents as
contemplated by Section 6.4, any material agreement to which the Company or any
of its Subsidiaries is a party or by which any of them or their properties is
bound, or constitute a default thereunder, or result in the creation or
imposition of any Encumbrance upon any of the property or assets of the Company
or any of its Subsidiaries pursuant to the terms of any such agreement or
instrument, or (iii) violate any provision of law or any applicable judgment,
ordinance, regulation or order of any court or governmental agency. The officer
executing this Agreement, and any other document executed and delivered by the
Company in connection herewith or therewith, is duly authorized to act on behalf
of the Company.
4.4. VALIDITY AND BINDING EFFECT. Each of the Operative Documents is
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such
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enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
4.5. CONTRACTS AND OTHER COMMITMENTS. Except as disclosed on SCHEDULE
4.5 and other than as filed by the Company with the Securities and Exchanges
Commission ("SEC") as an exhibit pursuant to Item 601(b)(10) of Regulation S-K
under the Securities Act of 1933, as amended (the "Securities Act"), the Company
and its Subsidiaries do not have and are not bound by any loans, liens, pledges,
security interests agreements, indentures or other instruments defining the
rights of security holders, under any securities or other financings upon which
the Company or any Subsidiary is obligated or by which the Company is bound.
4.6. LITIGATION. Except as previously disclosed in writing to Spescom,
there is no litigation, arbitration, claim, proceeding or investigation pending
or threatened in writing to which the Company or any Subsidiary is a party or to
which any of its respective properties or assets is the subject which, if
determined adversely to the Company or such Subsidiary, would individually or in
the aggregate cause a Material Adverse Event.
4.7. FINANCIAL STATEMENTS. The consolidated financial statements of the
Company and its Subsidiaries for the fiscal years ended December 31, 1998, 1997,
and 1996 (as subsequently restated), and the unaudited consolidated financial
statements as of and for the nine months ended September 30, 1999, and the
related notes, copies of which the Company previously has delivered to Spescom,
fairly present the financial position, results of operations, cash flows and
changes in stockholders' equity of the Company and its consolidated
Subsidiaries, at the respective dates of and for the periods to which they apply
in such financial statements, and have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied
throughout the periods indicated, subject, in the case of interim financial
statements, to normal recurring year-end adjustments (the effect of which will
not, individually or in the aggregate, be materially adverse) and the absence of
notes (that, if presented, would not differ materially from those included in
the most recent audited consolidated financial statements). No financial
statements of any other Person(s) are required by GAAP to be included in the
consolidated financial statements of the Company.
4.8. SEC REPORTS. The Company's Common Stock is listed for trading on
the OTC Bulletin Board and has been duly registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Since June
1998, the Company has timely filed all reports, registrations, proxy or
information statements, and all other documents, together with any amendments
required to be made thereto, required to be filed with the SEC under the
Securities Act and the Exchange Act (collectively, the "SEC Reports"). As of
their respective dates, the SEC Reports filed since June 1998 complied in all
material respects with all rules and regulations promulgated by the SEC and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.9. ABSENCE OF CHANGES. Except as set forth in SCHEDULE 4.9, the
Company's unaudited financial statements for the nine-month period ended
September 30, 1999 and the SEC Reports, since December 31, 1998, and except as
contemplated by this Agreement or by the Transactions, (i) neither the Company
nor any of its Subsidiaries have incurred any liabilities or obligations, direct
or contingent, or entered into any transactions, not in the ordinary course of
business, that are material to the Company, (ii) neither the Company nor any of
its Subsidiaries have purchased any of its outstanding capital stock or
declared, or paid any dividend or other distribution or payment in respect of
its capital stock, (iii) there has not been any change in the authorized or
issued capital stock, long-term debt, or short-term debt of the
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Company, and (iv) there has not been any material adverse change in or affecting
the business, operations, properties, prospects, assets, or condition (financial
or otherwise) of the Company or any Subsidiary, taken as a whole.
4.10. NO DEFAULTS. Except as set forth on SCHEDULE 4.10 and except
where a default or event of default does not and would not constitute a Material
Adverse Event, no default or event of default by the Company or any Subsidiary
exists under this Agreement or any of the Operative Documents, or under any
contract, or other material instrument or agreement to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or its
respective properties may be bound, except for any such default or event of
default which would not reasonably be expected to cause a Material Adverse
Event, and no event has occurred and is continuing that with notice or the
passage of time or both would constitute a default or event of default
thereunder.
4.11. COMPLIANCE WITH LAW. Except as disclosed in the SEC Reports, the
Company has complied with and is in compliance with all foreign, federal, state
or local laws, regulations, decrees and orders applicable to it (including but
not limited to the Foreign Corrupt Practices Act, occupational and health
standards and controls, antitrust, monopoly, restraint of trade or unfair
competition) to the extent that noncompliance, in the aggregate, would not
reasonably be expected to cause a Material Adverse Event.
4.12. TAXES. Except as set forth on SCHEDULE 4.12, the Company and its
Subsidiaries have filed or caused to be filed all federal, state and local
income, excise and franchise tax returns required to be filed (except for
returns that have been appropriately extended), and have paid, or provided for
the payment of, all taxes shown to be due and payable on said returns and all
other taxes, impositions, assessments, fees or other charges imposed on it by
any governmental authority, agency or instrumentality, prior to any delinquency
with respect thereto (other than taxes, impositions, assessments, fees and
charges currently being contested in good faith by appropriate proceedings, for
which appropriate amounts have been reserved), and the Company does not know of
any proposed assessment for additional taxes or any basis therefor. No tax liens
have been filed against the Company or its properties. The Company's federal
income tax liability has been finally determined by the Internal Revenue Service
and satisfied for all taxable years up to and including the taxable year ended
December 31, 1995, or closed by applicable statutes of limitation.
4.13. CERTAIN TRANSACTIONS. Except as set forth in the proxy statements
filed by the Company with the SEC and except as to indebtedness incurred in the
ordinary course of business and approved by the Board of Directors of the
Company, neither the Company nor any Subsidiary is indebted, directly or
indirectly, to any of its officers or directors, or to their respective spouses
or children, or to any affiliate, in excess of an aggregate amount of $60,000,
and none of such officers or directors or any members of their immediate
families or affiliates, are indebted to the Company or any Subsidiary in excess
of an aggregate amount of $60,000, or have any direct or indirect ownership
interest in any firm or corporation with which the Company or any Subsidiary is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company or any Subsidiary, except that the
Company's officers and directors may own individually no more than 1% of the
outstanding capital stock of any publicly traded company which competes directly
with the Company. Except as set forth in the proxy statements filed by the
Company with the SEC, no officer or director of the Company or any Subsidiary or
any member of their immediate families is, directly or indirectly, interested in
any material contract with the Company or any Subsidiary that would require
disclosure under Item 404 of Regulation S-K. Neither the Company nor any
Subsidiary is a guarantor or indemnitor of any indebtedness of any other person,
firm or corporation.
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4.14. TITLE TO PROPERTY. The Company and each Subsidiary has good and
marketable title to all of the real and personal property owned by it, free and
clear of all liens, security interests, pledges, encumbrances, equities claims
and restrictions of every kind and nature whatsoever, other than (a) liens for
taxes not yet due, (b) imperfections in title, if any, not material in amount
and which, individually or in the aggregate, do not materially interfere with
the conduct of the business of the Company or the use of its assets, (c) such
secured indebtedness as is disclosed in the financial statements covering the
assets and properties referred to therein (if any), (d) liens in the ordinary
course of business consistent with past practice and (e) installments of special
assessments not yet delinquent, recorded easements, covenants and other
restrictions, and utility easements, building restrictions, zoning restrictions
and other easements and restrictions existing generally with respect to
properties of a similar character. Any real property and buildings held under
lease by the Company or any Subsidiary are held under valid existing and
enforceable leases, except which are not material and do not interfere with the
use to be made of such buildings or property by the Company.
4.15. INTELLECTUAL PROPERTY.
4.15.1. To the Company's knowledge, the Company is the lawful
owner or has a valid right to use the proprietary information used in its
business free and clear of any claim, right, trademark, patent or copyright
protection of any third party; provided, however, that this Section 4.15.1 shall
not be deemed to include any representation regarding the absence of
infringements or conflicts with the rights of others, which representation is
made only in Section 4.15.3 hereof and only to the knowledge of the Company. As
used herein, "proprietary information" includes without limitation (i) any
computer software and related documentation, inventions, technical and
nontechnical data related thereto, and (ii) other documentation, inventions and
data related to patterns, plans, methods, techniques, drawings, finances,
customer lists, suppliers, products, special pricing and cost information,
designs, processes, procedures, formulas, research data owned or used by the
Company or any Subsidiary or marketing studies conducted by the Company, all of
which the Company considers to be commercially important and competitively
sensitive and which generally has not been disclosed to third parties other than
customers in the ordinary course of business.
4.15.2. To the Company's knowledge, the Company has good and
marketable title to or has a valid right to use all patents, trademarks, trade
names, service marks, copyrights or other intangible property rights, and
registrations or applications for registration thereof, owned by the Company or
any Subsidiary or used or required by the Company or any Subsidiary in the
operation of its business as presently being conducted; provided, however, that
this Section 4.15.2 shall not be deemed to include any representation regarding
the absence of infringements or conflicts with the rights of others, which
representation is made only in Section 4.15.3 hereof and only to the knowledge
of the Company.
4.15.3. The Company has no knowledge of any infringements or
conflict with asserted rights of others with respect to copyrights, patents,
trademarks, service marks, trade names, trade secrets or other intangible
property rights or know-how which could cause a Material Adverse Event. To the
Company's knowledge, no products or processes of the Company infringe or
conflict with any rights of patent or copyright, or any discovery, invention
product or process, that is the subject of a patent or copyright application or
registration known to the Company. The Company follows such procedures as the
Company deems necessary or appropriate to provide reasonable protection of the
Company's trade secrets and proprietary rights in intellectual property of all
kinds. To the knowledge of the Company, no person employed by or affiliated with
the Company has employed or proposes to employ any trade secret or any
information or documentation proprietary to any former employer, and to the
knowledge of the Company, no person employed by or affiliated with the Company
has violated any confidential relationship that such person may have had with
any third person, in connection with the development,
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manufacture or sale of any product or proposed product or the development or
sale of any service or proposed service of the Company.
4.16. ENVIRONMENTAL MATTERS. The Company has duly complied in all
material respects with, and its business, operations, assets, equipment,
property, leaseholds or other facilities are in compliance in all material
respects with, the provisions of all federal, state and local environmental,
health, and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder except to the extent that the violation thereof would not
reasonably be expected to cause a Material Adverse Event. The Company has been
issued and will maintain all required material federal, state and local permits,
licenses, certificates and approvals relating to (i) air emissions; (ii)
discharges to surface water or groundwater; (iii) noise emissions; (iv) solid or
liquid waste disposal; (v) the use, generation, storage, transportation or
disposal of toxic or hazardous substances or wastes (which shall include any and
all such materials listed in any federal, state or local law, code or ordinance
and all rules and regulations promulgated thereunder as hazardous or potentially
hazardous); or (vi) other environmental, health or safety matters, except to the
extent that the absence thereof would not reasonably be expected to cause a
Material Adverse Event. The Company has not during the two years prior to the
date hereof received notice of, does not know of, and does not suspect facts
which might constitute a material violation of any federal, state or local
environmental, health or safety laws, codes or ordinances, and any rules or
regulations promulgated thereunder with respect to its businesses, operations,
assets, equipment, property, leaseholds, or other facilities. Except in
accordance with a valid governmental permit, license, certificate or approval,
there has been no material emission, spill, release or discharge into or upon
(i) the air; (ii) soils, or any improvements located thereon; (iii) surface
water or groundwater; or (iv) the sewer, septic system or waste treatment,
storage or disposal system servicing the premises, of any toxic or hazardous
substances or wastes at or from the premises, except to the extent that any such
emission, spill, release or discharge would not reasonably be expected to cause
a Material Adverse Event. During the two years prior to the date hereof, there
has been no complaint, order, directive, claim, citation or notice by any
governmental authority or any person or entity with respect to (i) air
emissions; (ii) spills, releases or discharges to soils or improvements located
thereon, surface water, groundwater or the sewer, septic system or waste
treatment, storage or disposal systems servicing the premises; (iii) noise
emissions; (iv) solid or liquid waste disposal; (v) the use, generation,
storage, transportation or disposal of toxic or hazardous substances or waste;
or (vi) other environmental, health or safety matters materially affecting the
Company or its business, operations, assets, equipment, property, leaseholds or
other facilities. The Company does not have any material indebtedness,
obligation or liability (absolute or contingent, matured or not matured), with
respect to the storage, treatment, cleanup or disposal of any solid wastes,
hazardous wastes or other toxic or hazardous substances (including without
limitation any such indebtedness, obligation, or liability with respect to any
current regulation, law or statute regarding such storage, treatment, cleanup or
disposal).
4.17. ACCOUNTING MATTERS. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain accountability for the assets of the Company and each of
its Subsidiaries; (iii) access to the assets of the Company and each of its
Subsidiaries is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets of the
Company and each of its Subsidiaries are compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
4.18. DISTRIBUTIONS TO THE COMPANY. Except for limitations existing
under applicable law, no Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distributions on such Subsidiary's capital stock, from repaying to
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the Company any loans or advances to such Subsidiary, or from transferring any
of such Subsidiary's property or assets to the Company or any other Subsidiary
of the Company.
4.19. PRIOR SALES. All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times (i) exempt from the
registration requirements of the Securities Act or were duly registered under
the Securities Act, and (ii) were duly registered or were the subject of an
available exemption from the registration requirements of all applicable state
securities or Blue Sky laws.
4.20. REGULATORY COMPLIANCE. The conduct of the business and the
ownership of the assets of the Company is not dependent on any license, permit,
approval, waiver or other authorization of any federal, state or local
governmental or regulatory body which the Company has not obtained, except to
the extent that the absence thereof would not reasonably be expected to cause a
Material Adverse Event. All material licenses, permits and authorizations held
by the Company are in full force and effect.
4.21. MARGIN REGULATIONS. The Company is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock. No
proceeds received pursuant to this Agreement will be used to purchase or carry
any equity security of a class which is registered pursuant to Section 12 of the
Exchange Act.
4.22. LIMITED OFFERING. Subject in part to the truth and accuracy of
Spescom's representations set forth in this Agreement, the offer, sale and
issuance of the Shares is exempt from the registration requirements of the
Securities Act, and neither the Company nor any authorized agent acting on its
behalf has taken or will take any action hereafter that would cause the loss of
such exemption.
4.23. REGISTRATION OBLIGATIONS. Except as described in SCHEDULE 4.23,
the Company is not under any obligation to register under the Securities Act or
the Trust Indenture Act of 1939, as amended, any of its presently outstanding
securities or any of its securities that are proposed to be subsequently issued.
4.24. INSURANCE. The Company has maintained, and has caused each
Subsidiary to maintain, insurance coverage by financially sound and reputable
insurers with respect to their respective properties and business in such forms
and amounts and against such risks, casualties and contingencies as are
customary for corporations of comparable size and condition (financial and
otherwise) engaged in the same or a similar business and owning and operating
similar properties.
4.25. GOVERNMENTAL CONSENTS. No consent, approval, qualification, order
or authorization of, or filing with, any local, state, or federal governmental
authority is required on the part of the Company in connection with the
Company's valid execution, delivery, or performance of this Agreement by the
Company, except such filings as have been made prior to the Closing, notices of
sale required to be filed with the SEC under Regulation D of the Securities Act,
or such post-closing filings as may be required under applicable state
securities laws, which will be timely filed within the applicable periods
therefor.
4.26. EMPLOYEES. To the best of the Company's knowledge, there is no
strike, labor dispute or union organization activities pending or threatened
between it and its employees. None of the Company's employees belongs to any
union or collective bargaining unit. To the knowledge of the Company, the
Company has complied in all material respects with all applicable state and
federal equal opportunity and other laws related to employment. To the knowledge
of the Company, no employee of the Company is or will be in violation of any
judgment, decree, or order, or any term of any employment contract, patent
disclosure agreement, or other contract or agreement relating to the
relationship of any such employee with the Company, or any other party because
of the nature of the business conducted or presently proposed to be conducted by
the Company or to the use by the employee of his or her best efforts with
respect to such business. Other than as set forth on SCHEDULE 4.26 hereto and
other than the Company's
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1987 Stock Option Plan and its Amended and Restated 1996 Stock Incentive Plan,
the Company is not a party to or bound by any employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. There are no
threatened or pending claims by or on behalf of any such benefit plan, or any
employee covered under any such plan that allege a breach of fiduciary duties or
violation of other applicable state or federal law, nor is there any basis for
such a claim. To the knowledge of the Company, it is not aware that any officer
or key employee, or that any group of key employees, intends to terminate
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
4.27. ERISA. The Company is in compliance in all material respects with
all applicable provisions of Title IV of the Employee Retirement Income Security
Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. SS
1001 et seq. (1975), as amended from time to time ("ERISA"). Neither a
reportable event nor a prohibited transaction (as defined in ERISA) has occurred
and is continuing with respect to any "pension plan" (as such term is defined in
ERISA, a "Plan"); no notice of intent to terminate a Plan has been filed nor has
any Plan been terminated; no circumstances exist which constitute grounds
entitling the Pension Benefit Guaranty Corporation (together with any entity
succeeding to or all of its functions, the "PBGC") to institute proceedings to
terminate, or appoint a trustee to administer, a Plan, nor has the PBGC
instituted any such proceedings; neither the Company nor any commonly controlled
entity (as defined in ERISA) has completely or partially withdrawn from a
multiemployer plan (as defined in ERISA). The Company and each commonly
controlled entity has met its minimum funding requirements under ERISA with
respect to all of its Plans and the present fair market value of all Plan
property equals or exceeds the present value of all vested benefits under each
Plan, as determined on the most recent valuation date of the Plan and in
accordance with the provisions of ERISA and the regulations thereunder for
calculating the potential liability of the Company or any commonly controlled
entity to the PBGC or the Plan under Title IV or ERISA; and neither the Company
nor any commonly controlled entity has incurred any liability to the PBGC under
ERISA.
4.28. FEES/COMMISSIONS. The Company has not agreed to pay any finder's
fee, commission, origination fee or other fee or charge to any person or entity
with respect to or as a result of the consummation of the Transactions.
4.29. DISCLOSURE. No representation or warranty made as of the date
hereof by the Company contained in this Agreement, taken as a whole, contains or
will (as of the time so furnished) contain any untrue statement of a material
fact, or omits or will (as of the time so furnished) omit to state any material
fact which is necessary in order to make the statements contained herein or
therein not misleading.
4.30. NO UNDISCLOSED LIABILITIES.The Company has no debt, liability or
obligation of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) required by GAAP to be reflected or reserved
against on its balance sheet, except for liabilities or obligations reflected or
reserved against in the consolidated audited balance sheet of the Company and
its Subsidiaries for the fiscal year ended December 31, 1998, and the unaudited
consolidated balance sheet as of and for the nine months ended September 30,
1999, and current liabilities incurred in the ordinary course of business since
the respective dates thereof.
4.31. SURVIVAL. The representations and warranties of the Company
contained in this Agreement shall survive until the first anniversary of the
date of this Agreement.
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5. REPRESENTATIONS AND WARRANTIES OF SPESCOM. Spescom represents and
warrants to the Company that the following are true and accurate as of the date
of this Agreement. Spescom, as of the Closing Date, makes the following
representations and warranties to the Company:
5.1. CORPORATE STATUS. Spescom is a corporation duly organized, validly
existing and in good standing under the laws of South Africa and has the
corporate power to own and operate its properties, to carry on its business as
now conducted and to enter into and to perform its obligations under this
Agreement and any other document executed or delivered by Spescom in connection
herewith.
5.2. AUTHORIZATION. Spescom has full legal right, power and authority
to enter into and perform its obligations under this Agreement and any other
document executed and delivered by Spescom in connection herewith, without the
consent or approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement and any other
document executed and delivered by Spescom in connection herewith, and the
performance by Spescom of its obligations hereunder and/or thereunder are within
the corporate powers of Spescom, have received all necessary governmental
approvals, if any were required, have been duly authorized by all necessary
corporate action properly taken, and do not and will not contravene or conflict
with (i) the Memorandum and Articles of Association of Spescom, (ii) any
material agreement to which Spescom is a party or by which it or any of its
properties is bound, or constitute a default thereunder, or result in the
creation or imposition of any lien, charge, security interest or encumbrance of
any nature upon any of the property or assets of Spescom pursuant to the terms
of any such agreement or instrument, or (iii) violate any provision of law or
any applicable judgment, ordinance, regulation or order of any court or
governmental agency. The officer(s) executing this Agreement and any other
document executed and delivered by Spescom in connection herewith, is duly
authorized to act on behalf of Spescom.
5.3. VALIDITY AND BINDING EFFECT. This Agreement and any other document
executed and delivered by Spescom in connection herewith are the legal, valid
and binding obligations of Spescom, enforceable against it in accordance with
their respective terms.
5.4. NONRECOURSE ASSIGNMENT. Spescom is the owner of the Debenture and
the Preferred Stock, free and clear of all Encumbrances. Spescom's sale and
assignment of the Debenture and the Preferred Stock shall be made without
recourse against Spescom and without any warranties by Spescom except as
expressly set forth in this Agreement.
5.5. ACCREDITED INVESTOR; INVESTMENT INTENT. In connection with the
issuance and sale to Spescom of the Shares pursuant to this Agreement, Spescom
further represents and warrants to the Company as follows:
5.5.1. Spescom is acquiring the Shares for its own account as
principal, for investment, and not with a view to the distribution or resale
thereof, in whole or in part, in violation of the Securities Act or any
applicable state securities law, and Spescom has no present intention of
selling, negotiating or otherwise disposing of the Shares.
5.5.2. (i) The Shares have not been registered under the
Securities Act, and as such, such Shares are "restricted securities" as defined
in Rule 144; (ii) the Shares may not be resold unless they are registered under
the Securities Act or unless an exemption therefrom is available; (iii) Spescom
understands that the availability of Rule 144 for the sale and transfer of the
Shares is limited, and that certain conditions and events must exist and occur
before Spescom would be able to utilize Rule 144 in connection with the sale or
other disposition of the Shares.
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5.5.3. Spescom is an "accredited investor" under Rule 501(a)
under the Securities Act. Spescom understands that its investment in the Shares
involves a high degree of risk. Spescom has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investments contemplated by this Agreement. Spescom has been
afforded, to the satisfaction of Spescom, the opportunity to review the
financial and other information which it has requested from the Company, and to
obtain such additional publicly available information concerning the Company and
its business, and to ask such questions and receive such answers (based upon
publicly available information), as Spescom deems necessary to make an informed
investment decision.
5.5.4. Spescom understands that the Shares are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of the U.S. securities laws and that the Company is relying of the
truth and accuracy of, and Spescom's compliance with, the representations,
warranties, agreements, acknowledgments and understandings set forth herein in
order to determine the availability of such exemptions and the eligibility of
Spescom to acquire the Shares.
5.5.5. Notwithstanding anything in this Section 5.5 to the
contrary, Spescom may transfer and assign its rights and obligations under this
Agreement to one or more of its wholly-owned subsidiaries, provided that any
such subsidiary shall agree to become bound by the terms of this Agreement,
including the representations and warranties contained in this Section 5.5, and
provided, further that Spescom shall remain liable for the performance of its
obligations hereunder notwithstanding any such assignment.
5.6. GOVERNMENTAL CONSENTS. Except for the approval of the South Africa
Reserve Bank under the South Africa Exchange Control Regulations for
consummation of the Transaction ("Reserve Bank Approval"), Spescom is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court of governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or purchase the
Shares in accordance with terms hereof. Spescom shall use its commercially
reasonable best efforts to obtain Reserve Bank Approval.
5.7. NO DEFAULT. Spescom has no actual knowledge of any breach by the
Company of the Company's representations and warranties in the May 1999
Agreement.
5.8. SURVIVAL. The representations and warranties of Spescom contained
in this Agreement shall survive until the first anniversary of the date of this
Agreement.
6. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company
to consummate the Transactions is subject to the satisfaction of, or waiver by
the Company of, the following conditions prior to or contemporaneously with the
Closing, unless otherwise indicated:
6.1. The representations and warranties made by Spescom in this
Agreement shall be true and correct in all material respects as of the Closing,
as if made at and as of the Closing Date, and Spescom shall have complied with
the covenants, agreements, and obligations set forth in this Agreement and
required to be performed by it at or before the Closing;
6.2. There shall not be any order, decree, injunction, or judgment
enjoining the consummation of this Agreement;
6.3. The shareholders of the Company shall have approved the sale and
issuance of the Shares to Spescom and the other Transactions;
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6.4. Any consents or approvals required to be obtained from any third
party, and any amendments of agreements which shall be necessary to permit the
consummation of the Transactions on the Closing Date, shall have been obtained
and all such consents or amendments shall be satisfactory in form and substance
to the Company and the Company's counsel.
6.5. Spescom shall have delivered to the Company a certificate, dated
the Closing Date, signed by the Managing Director or Financial Director of
Spescom, substantially in the form attached hereto as EXHIBIT D;
6.6. All proceedings taken in connection with the Transactions, and all
documents necessary to the consummation thereof, shall be reasonably
satisfactory in form and substance to the Company and the Company's counsel, and
Spescom shall have delivered to the Company a certificate, dated the Closing
Date, signed by the Secretary of Spescom, substantially in the form attached
hereto as EXHIBIT E;
6.7. The Company shall have received the opinion of Solomon Ward
Seidenwurm & Smith, LLP, counsel for Spescom, dated the Closing Date, addressed
to the Company, in form and substance satisfactory to the Company's counsel, and
covering the matters set forth in EXHIBIT F hereto.
7. CONDITIONS TO OBLIGATIONS OF SPESCOM. The obligation of Spescom to
consummate the Transactions is subject to the satisfaction of, or the waiver by
Spescom of, the following conditions prior to or contemporaneously with the
Closing, unless otherwise indicated:
7.1. The representations and warranties made by the Company in this
Agreement shall be true and correct in all material respects as of the Closing,
as if made at and as of the Closing Date, and the Company shall have complied
with the covenants, agreements, and obligations set forth in this Agreement and
required to be performed by it at or before the Closing;
7.2. There shall not be any order, decree, injunction, or judgment
enjoining the consummation of this Agreement;
7.3. The shareholders of the Company shall have approved the sale and
issuance of the Shares to Spescom and the other Transactions;
7.4. The Company's Board of Directors shall have adopted the Annual
Plan for fiscal year during which the Closing occurs.
7.5. Any consents or approvals required to be obtained from any third
party, and any amendments of agreements which shall be necessary to permit the
consummation of the Transactions on the Closing Date, shall have been obtained
and all such consents or amendments shall be satisfactory in form and substance
to Spescom and Spescom's counsel;
7.6. The Company shall have issued to Spescom a new Stock Purchase
Warrant to replace the Warrant Spescom purchased from Finova;
7.7. The Company shall have issued 1,428,571 Shares to Spescom in
consideration of the conversion of the Loan into Common Stock of the Company.
7.8. The Company shall have entered into an employment agreement with
Roger Erickson, on terms reasonably satisfactory to Spescom (the "Employment
Agreement");
7.9. Spescom shall have obtained the Reserve Bank Approval.
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7.10. The Company shall have issued to Spescom the following
certificates of public officials, in each case as of a date within ten days of
the Closing Date:
7.10.1. the Articles of Incorporation of the Company certified
by the Secretary of State of the State of California; and
7.10.2. a certificate as to the legal existence and good
standing of the Company from the Secretary of State of the State of California.
7.11. The Company shall have delivered to Spescom a certificate, dated
the Closing Date, signed by the President or Chief Financial Officer of the
Company, substantially in the form attached hereto as EXHIBIT G;
7.12. All proceedings taken in connection with the Transactions, and
all documents necessary to the consummation thereof, shall be reasonably
satisfactory in form and substance to Spescom and Spescom's counsel, and the
Company shall have delivered to Spescom a certificate, dated the Closing Date,
signed by the Secretary of the Company, substantially in the form attached
hereto as EXHIBIT H;
7.13. Spescom shall have received the opinion of Gibson, Dunn &
Crutcher LLP, counsel for the Company, dated the Closing Date, addressed to
Spescom, in form and substance satisfactory to Spescom's counsel, and covering
the matters set forth in EXHIBIT I hereto.
8. FAILURE TO CLOSE
8.1. If on the Closing Date the Company fails to tender to Spescom the
Shares to be issued to Spescom for any reason other than the failure of the
shareholders of the Company to approve the Transactions, or if the conditions
specified in this Section 8 have not been fulfilled, Spescom may thereupon elect
to be relieved of all further obligations under this Agreement, without
prejudice to any other Spescom's rights or remedies. Without limiting the
foregoing, if the conditions specified in this Section 8 have not been
fulfilled, Spescom may waive compliance by the Company with any such condition
to such extent as Spescom, in Spescom's sole discretion, may determine. Nothing
in this Section 8.1 shall operate to relieve the Company of any of its
obligations hereunder or to waive any of Spescom's rights against the Company.
8.2. If the Company fails to consummate this Agreement solely for
non-fulfillment of the condition specified in Section 6.3, then:
8.2.1. Subject to the fulfillment, or waiver by the Company,
of the conditions in Sections 6.1, 6.2, 6.4 and 6.5, the Company will cause 40%
of the outstanding shares of the capital stock of Altris UK to be transferred to
Spescom against delivery under Section 8.2.2 below;
8.2.2. Subject to the fulfillment, or waiver by Spescom, of
the conditions specified in Sections 7.1 and 7.11, Spescom will release to the
Company the Escrow Funds; and
8.2.3. Spescom may thereupon elect to be relieved of all
further obligations under this Agreement without prejudice to any other
Spescom's rights or remedies.
9. COVENANTS.
9.1. BOARD OF DIRECTORS DESIGNEES. Effective upon the Closing, (i) the
size of the Board of Directors of the Company shall be five (5) directors, and
(ii) two nominees of Spescom shall be elected as
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directors (the "Spescom Nominees"). For so long as Spescom or any Affiliate of
Spescom holds at least thirty-three (33%) of the Shares, the Company agrees to
include two nominees of Spescom in management's slate of nominees to be elected
to the Board of Directors of the Company and to recommend to the stockholders
the election of such nominees. Any Spescom Nominees shall be reimbursed for all
reasonable expenses incurred as a director and shall be entitled to receive such
compensation as may be received by other non-employee or employee directors of
the Company, as the case may be, including indemnity and advancement of expenses
to the fullest extent permitted under applicable law.
9.2. USE OF PROCEEDS. The Purchase Price shall be deposited in a
separate bank account in the name of the Company. Any expenditure, disbursement,
commitment, or other use by the Company of the Purchase Price that is not
provided for in the applicable budget in the Annual Plan shall require: (a) if
more than $100,000 (i) the approval of the Company's Board of Directors, and
(ii) the unanimous approval of both Spescom Nominees, and (b) if less than
$100,000 but more than $25,000, the approval of one of Spescom's Nominees.
9.3. ADDITIONAL COVENANTS. From and after the Closing Date:
9.3.1. CORPORATE EXISTENCE, ETC. The Company will preserve and
keep in force and effect, and will cause each Subsidiary to preserve and keep in
force and effect, its corporate existence and good standing in the state of
incorporation thereof, its qualification and good standing as a foreign
corporation in each jurisdiction where such qualification is required by
applicable law except where the failure to so qualify would not constitute a
Material Adverse Event, and all licenses and permits necessary to the proper
conduct of its business.
9.3.2. MAINTENANCE, ETC. The Company will maintain, preserve
and keep, and will cause each Subsidiary to maintain, preserve and keep, its
properties and assets which are used or useful in the conduct of its business
(whether owned in fee or pursuant to a leasehold interest) in good repair and
working order and from time to time will make all necessary repairs,
replacements, renewals and additions so that at all times the efficiency thereof
shall be maintained.
9.3.3. NATURE OF BUSINESS. Neither the Company nor any
Subsidiary will engage in any business if, as a result, the general nature of
the business, taken on a consolidated basis, which would then be engaged in by
the Company and its Subsidiaries would be substantially changed from the general
nature of the business engaged in by the Company and its Subsidiaries on the
date of this Agreement.
9.3.4. INSURANCE. The Company will maintain, and will cause
each Subsidiary to maintain, insurance coverage by financially sound and
reputable insurers with respect to their respective properties and business in
such forms and amounts and against such risks, casualties and contingencies as
are customary for corporations of comparable size and condition (financial and
otherwise) engaged in the same or a similar business and owning and operating
similar properties.
9.3.5. TAXES, CLAIMS FOR LABOR AND MATERIALS. The Company will
promptly pay and discharge, and will cause each Subsidiary promptly to pay and
discharge, (i) all lawful taxes, assessments and governmental charges or levies
imposed upon the property or business of the Company or such Subsidiary,
respectively, (ii) all trade accounts payable in accordance with usual and
customary business terms, and (iii) all claims for work, labor or materials,
which if unpaid might become a lien or charge upon any property of the Company
or such Subsidiary; provided the Company or such Subsidiary shall not be
required to pay any such tax, assessment, charge, levy, account payable or claim
if (i) the validity, applicability or amount thereof is being contested in good
faith by appropriate actions or proceedings
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which will prevent the forfeiture or sale of any property of the Company or such
Subsidiary or any material interference with the use thereof by the Company or
such Subsidiary, and (ii) the Company or such Subsidiary shall set aside on its
books, reserves deemed by it to be adequate with respect thereto.
9.3.6. COMPLIANCE WITH LAWS, AGREEMENTS, ETC. Except where
failure to do so does not and would not constitute a Material Adverse Event, the
Company shall maintain its business operations and property owned or used in
connection therewith in compliance with (i) all applicable federal, state and
local laws, regulations and ordinances, and such laws, regulations and
ordinances of foreign jurisdictions, governing such business operations and the
use and ownership of such property, and (ii) all agreements, licenses,
franchises, indentures and mortgages to which the Company is a party or by which
the Company or any of its properties is bound. Without limiting the foregoing,
the Company shall pay all of its indebtedness promptly and substantially in
accordance with the terms thereof.
9.3.7. ERISA MATTERS. If the Company has in effect, or
hereafter institutes, a Plan, then the following covenants shall be applicable
during such period as any such Plan shall be in effect: (i) throughout the
existence of the Plan, the Company's contributions under the Plan will meet the
minimum funding standards required by ERISA and the Company will not institute a
distress termination of the Plan; and (ii) the Company will send to Spescom a
copy of any notice of a reportable event (as defined in ERISA) required by ERISA
to be filed with the Labor Department or the PBGC, at the time that such notice
is so filed.
9.3.8. BOOKS AND RECORDS: RIGHTS OF INSPECTION. The Company
will keep, and will cause each Subsidiary to keep, proper books of record and
account in which full and correct entries will be made of all dealings or
transactions of or in relation to the business and affairs of the Company or
such Subsidiary, in accordance with GAAP consistently maintained. The Company
shall permit a representative of Spescom to visit any of its properties and
inspect its corporate books and financial records, and will discuss its
accounts, affairs and finances with a representative of Spescom, during
reasonable business hours, at such times as Spescom may reasonably request.
9.3.9. REPORTS. The Company will furnish to Spescom the
following:
9.3.9.1. QUARTERLY STATEMENTS. As soon as available
and in any event within 45 days after the end of each quarterly fiscal period
(except the last) of each fiscal year, copies of the following, in each case
setting forth in comparative form the consolidated figures for the preceding
fiscal year, all in reasonable detail:
(a) consolidated balance sheets of the Company and
Subsidiaries as of the close of the three-month period then ended,
setting forth in comparative form the consolidated figures at the end
of the preceding fiscal year,
(b) consolidated statements of income of the Company
and Subsidiaries for the three-month period then ended, setting forth
in comparative form the consolidated figures for the corresponding
period of the preceding fiscal year, and
(c) consolidated statements of cash flows of the
Company and Subsidiaries for the portion of the fiscal year ending with
such three-month period, setting forth in comparative form the
consolidated figures for the corresponding period of the preceding
fiscal year.
9.3.9.2. ANNUAL STATEMENTS. As soon as available
and in any event within 90 days after the close of each fiscal year of the
Company, copies of the following, in each case setting forth in comparative form
the consolidated figures for the preceding fiscal year, all in reasonable detail
and
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accompanied by a report thereon of a firm of independent public accountants of
recognized national standing or a firm reasonably acceptable to Spescom:
(a) consolidated balance sheets of the Company and
Subsidiaries as of the close of such fiscal year, and
(b) consolidated statements of income and changes in
shareholders equity and cash flows of the Company and Subsidiaries for
such fiscal year.
9.3.10. SEC AND OTHER REPORTS. Promptly upon their becoming
available, one copy of each financial statement, report, notice or proxy
statement sent by the Company to stockholders generally and of each periodic or
current report, and any registration statement or prospectus filed by the
Company or any Subsidiary with any securities exchange or the SEC or any
successor agency, and copies of any orders in any proceedings to which the
Company or any of its Subsidiaries is a party, issued by any governmental
agency, federal or state, having jurisdiction over the Company or any of its
Subsidiaries. The Company specifically covenants to timely file each such item
required to be filed with the SEC and each state requiring securities laws
filings; and
9.3.11. PIPELINE REPORT AND OTHER REQUESTED INFORMATION.
Within five business days of request by Spescom, the Company's internal pipeline
report, and with reasonable promptness, such financial data and other
information relating to the business of the Company as Spescom may from time to
time reasonably request.
9.3.12. ANNUAL PLAN. The Board of Directors shall adopt no
later than the thirty-first day of each fiscal year, a financial plan for the
Company, which shall include at least a projection of income and expenses
(including capital expenditures) and a projected cash flows statement for each
quarter in such fiscal year, and a projected balance sheet as of the end of each
quarter in such fiscal year (the "Annual Plan"). The Annual Plan may only be
amended or revised, in any material manner, with the written approval of the
Board of Directors and both Spescom Nominees.
9.3.13. FURTHER ASSURANCES. The Company and Spescom will each
take all actions reasonably requested by the other party to effect the
Transactions and the other Operative Documents.
9.3.14. CONFIDENTIALITY. Spescom shall maintain in confidence
all confidential information it receives pursuant to Sections 9.3.8 or 9.3.11
above. Spescom acknowledges having been informed and advised of its obligations
under applicable securities laws with respect to trading on "insider
information."
9.3.15. REGISTRATION RIGHTS. Spescom shall be entitled to
register the Shares as provided in the Registration Rights Agreement.
9.3.16. CONFLICT. If the rights set forth in Sections 9.3.4
through 9.3.12 are different than any other agreement subsisting between the
Company and Spescom, the provisions of this Agreement shall prevail and apply.
9.3.17. EXPIRATION OF COVENANTS. The covenants contained in
this Section 9.3 shall expire on the earlier of (a) the fifth anniversary of the
Closing Date, or (b) such date when Spescom (together with its Affiliates) holds
less than 15% of the Shares.
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9.4. EMPLOYMENT OF JOSEPH BUCKLEY. Effective as of the Closing, Spescom
shall ensure that Joseph Buckley enters into an employment relationship with the
Company on terms substantially similar the terms of his present employment with
Spescom.
9.5. MODIFICATION OF FINOVA INSTRUMENTS. Effective as of the Closing,
the Finova Instruments shall be modified as follows:
9.5.1. CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT.
Effective as of the Closing, the following provisions of the Convertible
Preferred Stock Agreement shall terminate and be of no further force or effect.
Section 1.4 (Contingent Warrants), Article 7 (Conversion of Preferred Stock),
Section 8.2 (Registration Rights) and Article 9 (Events of Default; Remedies).
9.5.2. DEBENTURE PURCHASE AGREEMENT. Effective as of the
Closing, the following provisions of the Debenture Purchase Agreement shall
terminate and be of no further force or effect. Section 1.3 (Additional
Warrants), Article 7 (Subordination of Debentures), Section 8.2 (Registration
Rights) and Article 9 (Events of Default; Remedies).
9.5.3. FINOVA REGISTRATION RIGHTS AGREEMENT. Effective as of
the Closing, the Finova Registration Rights Agreement shall terminate and be of
no further force or effect.
9.5.4. SECURITY AGREEMENT. Effective as of the Closing, the
Security Agreement shall terminate and be of no further force or effect.
9.6. MODIFICATION OF MAY 1999 AGREEMENT. Effective as of the Closing,
the May 1999 Agreement shall be modified as follows:
9.6.1. Effective as of the Closing, Section 7.1.2
(Registration Rights) of the May 1999 Agreement shall terminate and be of no
further force or effect.
9.6.2. Effective as of the Closing, Section 7.2 of the May
1999 Agreement shall terminate and be of no further force or effect.
9.6.3. Effective as of the Closing, Section 17 of the May 1999
Agreement shall be amended to provide that any arbitration under the May 1999
Agreement will take place in San Diego, California, in accordance with the
provisions of Section 11.14 of this Agreement.
9.6.4. Effective as of the Closing, Section 25.1 of the May
Agreement shall be amended to provide that pipeline reports shall be delivered
within five days of request by Spescom.
9.7. TERMINATION OF SHAREHOLDERS AGREEMENT. Effective as of the
Closing, the Shareholders Agreement between Spescom, Altris Group Plc, the
Company and Altris UK, dated May 7, 1999 (the "Shareholders Agreement") shall
terminate and be of no further force or effect. The Company shall execute, and
shall cause Altris Group Plc to execute, any document requested by Spescom to
reflect such termination.
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10. INDEMNIFICATION AND LIMITATION ON LIABILITY.
10.1. INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE COMPANY. The
Company will indemnify and hold harmless Spescom and its stockholders,
controlling persons, and Affiliates (collectively, the "Indemnified Persons")
for, and will pay to the Indemnified Persons the amount of, any loss, liability,
claim, damage, expense (including costs of investigation and defense and
reasonable attorneys' fees) or diminution of value, whether or not involving a
third-party claim (collectively, "Damages"), arising, directly or indirectly,
from or in connection with: (a) any breach of any representation or warranty
made by the Company in this Agreement, the Disclosure Schedule, or in any
certificate delivered by the Company pursuant to this Agreement, (b) any breach
by the Company of any covenant or obligation of the Company in this Agreement,
or (c) any claim by any Person for brokerage or finder's fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by such Person with the Company (or any Person acting on its behalf) in
connection with any of the Transactions. The remedies provided in this Section
10.1 will be exclusive remedies available to Spescom or the other Indemnified
Persons for the Damages sets forth above without prejudice to any equitable
relief to which Spescom may be entitled.
10.2. INDEMNIFICATION AND PAYMENT OF DAMAGES BY SPESCOM. Spescom will
indemnify and hold harmless the Company, and will pay to the Company the amount
of any Damages arising, directly or indirectly, from or in connection with (a)
any breach of any representation or warranty made by Spescom in this Agreement
or in any certificate delivered by Spescom pursuant to this Agreement, (b) any
breach by Spescom of any covenant or obligation of Spescom in this Agreement, or
(c) any claim by any Person against Spescom for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Spescom (or any Person acting on
its behalf) in connection with any of the Transactions. The remedies provided in
this Section 10.2 will be exclusive remedies available to the Company for the
Damages sets forth above without prejudice to any equitable relief to which the
Company may be entitled.
10.3. LIMITATIONS ON AMOUNT - THE COMPANY. The Company will have no
liability (for indemnification or otherwise) with respect to the matters
described in Section 10.1 until the total of all Damages with respect to such
matters exceeds $50,000, and then only for the amount by which such Damages
exceed $50,000. The total liability (for indemnification or otherwise) for
Damages that the Company shall be liable for in connection with any breach of
the representations and warranties made by the Company in this Agreement
(including any indemnification obligation pursuant to Section 10.1 relating to
such representations and warranties) shall be limited in the aggregate amount of
the Purchase Price. However, this Section 10.3 will not apply to any breach of
any of the Company's representations and warranties of which the Company had
knowledge at any time prior to the date on which such representation and
warranty is made or any intentional breach by the Company of any covenant or
obligation, and the Company will be liable for all Damages with respect to such
breaches.
10.4. LIMITATIONS ON AMOUNT - SPESCOM. Spescom will have no liability
(for indemnification or otherwise) with respect to the matters described in
Section 10.2 until the total of all Damages with respect to such matters exceeds
$50,000, and then only for the amount by which such Damages exceed $50,000. The
total liability for Damages that Spescom shall be liable for in connection with
any breach of the representations and warranties made by Spescom in this
Agreement (including any indemnification obligation pursuant to Section 10.2
relating to such representations and warranties) shall be limited in the
aggregate amount of the Purchase Price. However, this Section 10.4 will not
apply to any breach of any of Spescom's representations and warranties of which
Spescom had knowledge at any time prior to the date on which such representation
and warranty is made or any intentional breach by Spescom of any covenant or
obligation, and Spescom will be liable for all Damages with respect to such
breaches.
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<PAGE>
11. MISCELLANEOUS.
11.1. GOVERNING LAW, VENUE AND JURISDICTION. This Agreement is governed
by and construed in accordance with the laws of the State of California,
irrespective of California's choice-of-law principles. All actions and
proceedings arising in connection with this Agreement must be tried and
litigated exclusively in the State or Federal courts located in the County of
San Diego, State of California, which courts have personal jurisdiction and
venue over each of the parties to this Agreement for the purpose of adjudicating
all matters arising out of or related to this Agreement. Each party authorizes
and accepts service of process sufficient for personal jurisdiction in any
action against it as contemplated by this Section by registered or certified
mail, return receipt requested, postage prepaid, to its address for the giving
of notices set forth in this Agreement.
11.2. FURTHER ASSURANCES. Each party to this Agreement shall execute
and deliver all instruments and documents and take all actions as may be
reasonably required or appropriate to carry out the purposes of this Agreement.
11.3. TIME OF ESSENCE. Time and strict and punctual performance are of
the essence with respect to each provision of this Agreement.
11.4. ATTORNEY'S FEES. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
11.5. MODIFICATION. This Agreement may be modified only by a contract
in writing executed by the party to this Agreement against whom enforcement of
the modification is sought.
11.6. PRIOR UNDERSTANDINGS. This Agreement and all documents
specifically referred to and executed in connection with this Agreement: (a)
contain the entire and final agreement of the parties to this Agreement with
respect to the subject matter of this Agreement, and (b) supersede all
negotiations, stipulations, understandings, agreements, representations and
warranties, if any, with respect to such subject matter, which precede or
accompany the execution of this Agreement.
11.7. INTERPRETATION. Whenever the context so requires in this
Agreement, all words used in the singular may include the plural (and vice
versa). The terms "includes" and "including" do not imply any limitation. No
remedy or election under this Agreement is exclusive, but rather, to the extent
permitted by applicable law, each such remedy and election is cumulative with
all other remedies at law or in equity. The Section headings in this Agreement:
(a) are included only for convenience, (b) do not in any manner modify or limit
any of the provisions of this Agreement, and (c) may not be used in the
interpretation of this Agreement.
11.8. PARTIAL INVALIDITY. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability.
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<PAGE>
11.9. NOTICES. Each notice and other communication required or
permitted to be given under this Agreement ("Notice") must be in writing. Notice
is duly given to another party upon: (a) hand delivery to the other party, (b)
receipt by the other party when sent by facsimile to the address and number for
such party set forth below (provided, however, that the Notice is not effective
unless a duplicate copy of the facsimile Notice is promptly given by one of the
other methods permitted under this Section), (c) three business days after the
Notice has been deposited with the United States postal service as first class
certified mail, return receipt requested, postage prepaid, and addressed to the
party as set forth below, or (d) the next business day after the Notice has been
deposited with a reputable overnight delivery service, postage prepaid,
addressed to the party as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of delivery
from the delivery-service-provider.
If to Spescom: Spescom Limited
Spescom Park
Cnr Alexandra & Second Street
Halfway House
Midrand 1685
South Africa
Telecopier: 2711-266-1707
Attention: Hilton Isaacman
with a copy to: Solomon Ward Seidenwurm & Smith, LLP
401 B Street, Suite 1200
San Diego, California 92101
Telecopier: (619) 231-4755
Attention: Norman L. Smith, Esq.
If to the Company: Altris Software, Inc.
9339 Carroll Park Drive
San Diego, California 92121
Facsimile No.: (858) 546-7671
Attention: Roger Erickson
with a copy to: Gibson, Dunn & Crutcher LLP
2029 Century Park East, Suite 4000
Los Angeles, California 90067
Facsimile No.: (310) 551-8741
Attention: Russell C. Hansen, Esq.
Each party shall make a reasonable, good faith effort to ensure that it will
accept or receive Notices to it that are given in accordance with this Section.
A party may change its address for purposes of this Section by giving the other
party(ies) written notice of a new address in the manner set forth above.
11.10. WAIVER. Any waiver of a default or provision under this
Agreement must be in writing. No such waiver constitutes a waiver of any other
default or provision concerning the same or any other provision of this
Agreement. No delay or omission by a party in the exercise of any of its rights
or remedies constitutes a waiver of (or otherwise impairs) such right or remedy.
A consent to or approval of an act does not waive or render unnecessary the
consent to or approval of any other or subsequent act.
11.11. DRAFTING AMBIGUITIES. Each party to this Agreement and its legal
counsel have reviewed and revised this Agreement. The rule of construction that
ambiguities are to be resolved against the
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<PAGE>
drafting party or in favor of the party receiving a particular benefit under an
agreement may not be employed in the interpretation of this Agreement or any
amendment to this Agreement.
11.12. THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended
to confer any rights or remedies on any person or entity other than the parties
to this Agreement and their respective successors-in-interest and permitted
assignees, unless such rights are expressly granted in this Agreement to another
person specifically identified as a "Third Party Beneficiary."
11.13. AUTHORITY. Each of the individuals signing below on behalf of an
entity represents and warrants that it is fully authorized to do so on behalf of
such entity.
11.14. ARBITRATION. Arbitration constitutes the sole and exclusive
remedy for the settlement of any dispute or controversy concerning this
Agreement, any other agreements between the parties or the rights of the parties
under such agreements, including whether the dispute or controversy is
arbitrable. If any other agreement subsisting between Spescom and the Company
provides for arbitration of any dispute and such arbitration provision is
different than the arbitration set forth in this Section 11.14, this Section
11.14 shall prevail and apply. The arbitration proceeding will be conducted in
San Diego, California, before a single arbitrator under the Commercial
Arbitration Rules of the American Arbitration Association in effect at the time
a demand for arbitration is made. The single arbitrator shall be a former or
retired judge of a California Superior Court or a U.S. Federal Court (having
appointment under Article 3 of the U.S. Constitution). California law governs
this Agreement, irrespective of California's or any other jurisdiction's
choice-of-law principles. To the extent that there is any conflict between the
rules of the American Arbitration Association and this arbitration clause, this
clause will govern and determine the rights of the parties. The decision of the
arbitrator, including the determination of the amount of any damages suffered,
will be exclusive, final, and binding on all parties, their heirs, executors,
administrators, successors, and assigns, as applicable, and judgment thereon may
be entered in any court of competent jurisdiction. The costs of arbitration,
including administrative fees, fees for a record and transcript, and the
arbitrator's fees, as well as reasonable attorney's fees will be awarded to the
party determined by the arbitrator to be the prevailing party. The parties
incorporate the provisions of California Code of Civil Procedure Section 1283.05
into this Agreement and make those provisions part of and applicable to any
proceedings arising under the terms of this Agreement.
11.15. SURVIVAL OF AGREEMENTS. All covenants, agreements,
representations, and warranties made herein shall survive the execution and
delivery hereof and remain in full force and effect, notwithstanding any
investigation made at any time by or on behalf of any party hereto.
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<PAGE>
11.16. PARTIES IN INTEREST. All representations, covenants, and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
permitted assigns of the parties hereto, whether so expressed or not. Spescom
shall have the right to assign or transfer its rights hereunder to one or more
Affiliates of Spescom.
ALTRIS SOFTWARE, INC.
By:/s/ John W. Low
---------------------------------
Chief Financial Officer
SPESCOM LIMITED
By:/s/ Hilton Isaacman
---------------------------------
Director of Corporate Finance
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<PAGE>
ANNEX B
December 20, 1999
Board of Directors
Altris Software, Inc.
9339 Carlton Park Drive
San Diego, CA 92121
Members of the Board:
Pursuant to the Stock Purchase Agreement (the "Stock Purchase Agreement")
between Altris Software, Inc. (the "Company" or "Altris") and Spescom Ltd., a
South African company, we understand that in addition to other related
transactions, (i) the Company will issue 5,285,714 shares of its common stock to
Spescom at a subscription price of $0.70 per share and (ii) issue 9,528,096
shares of its common stock to Spescom in exchange for Spescom's delivery to the
Company (including any right to accrued interest and dividends) of an 11.5%
Subordinated Debenture in the principle amount of $3,000,000 and 3,000 shares of
the Company's Series E Convertible Preferred Stock (together, the "Proposed
Transactions"). The terms and conditions of the Proposed Transactions with
Spescom are set forth in more detail in the Stock Purchase Agreement.
We have been requested by the Board of Directors of the Company to render our
opinion as investment bankers as to whether the consideration to be received by
the Company pursuant to the Proposed Transactions is fair to the Company and its
shareholders from a financial point of view. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Proposed Transactions.
In arriving at our opinion, we reviewed and analyzed:
1) the terms of the Proposed Transactions;
2) publicly available information concerning the Company and its holdings that
we believe to be relevant to our analysis;
3) public information with respect to certain other companies engaged in
businesses which we believe to be generally comparable to certain of the
businesses conducted by the Company;
4) other studies and economic and market data as we deemed necessary or
appropriate.
5) financial and operating information with respect to the business operations
and prospects of the Company furnished to us by the Company;
6) a trading history of the Company's common stock from 20 July 1998 to the
present;
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<PAGE>
7) a comparison of certain of the Company's trading multiples with those of
other companies that we deemed relevant;
8) a comparison of the purchase price to the Company's common stock price at
various dates and with the purchase premium or discount of certain other
transactions that we deemed relevant.
In addition, we have also held discussion with the management of the Company
regarding the effect of the Proposed Transactions on the operations and future
investment strategy of the Company.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of the management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of certain
of the Company's holdings, upon advice of the Company we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of such holdings. In arriving at our
opinion, we have not conducted a physical inspection of the properties and
facilities of the Company's holdings, have not made or obtained any evaluations
or appraisals of the assets or liabilities of such holdings and express no
opinion regarding the liquidation value of the Company. Furthermore, we are not
expressing any opinion in this letter regarding the price at which the common
stock of the Company may trade at any time.
Our opinion necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter. In
furnishing our opinion, we further have assumed that the Proposed Transactions
shall comply with all applicable federal and state laws and shall not result in
any breach, violation or cancellation of, or forfeiture of any rights, benefits
or interests to or in, any agreements, plans, commitments or arrangements to
which the Company is a party or in respect of which the Company or any of its
assets are subject or bound. Without limiting the generality of the foregoing,
we have undertaken no independent analysis of any pending or threatened
litigation, possible unasserted claims or other contingent liabilities, to which
either the Company or its affiliates is a party or to which either may be
subject and at the Company's direction and with its consent, our opinion makes
no assumption concerning and therefore does not consider, the possible assertion
of claims, outcomes or damages arising out of such matters.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the consideration to be received by the Company in the
Proposed Transactions with Spescom is fair to the Company and its shareholders
from a financial point of view, as of the date hereof.
The Company has agreed to indemnify us for certain liabilities that may arise
out of the rendering of this opinion. We also have performed various investment
banking services for the Company in the past and have received customary fees
for such services and may provide investment banking services to the Company and
its affiliates in the future. In the ordinary
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<PAGE>
course of our business, we have traded and may in the future actively trade in
the equity securities of the Company for the accounts of our customers and may
in the future actively trade in the equity securities of the Company for our own
account and may provide investment banking services to the Company in the
future. Accordingly, we may at any time hold a long or short position in such
securities. As compensation for our services in rendering this opinion, we have
received certain cash fees and certain warrants to purchase common stock with an
exercise price based upon the average closing price of the Company's common
stock over a designated trading period, neither of which is contingent upon
closing of the Proposed Transactions.
This opinion is for the use and benefit of the Company's Board of Directors and
is rendered to them in connection with their consideration of the Proposed
Transactions. This opinion is not intended to be and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Proposed Transactions. This opinion may not be
used or referred to by the Company, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is hereby given to the
inclusion of this opinion in any proxy statement or prospectus files with the
Securities and Exchange Commission.
Very truly yours,
/s/ BROADMARK CAPITAL
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<PAGE>
PROXY
ALTRIS SOFTWARE, INC.
9339 Carroll Park Drive
San Diego, California 92121
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
ALTRIS SOFTWARE, INC.
The undersigned hereby appoints Roger H. Erickson and John W. Low, and
each of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes each of them to represent and vote as designated below, all
the shares of Common Stock of Altris Software, Inc., a California corporation
(the "Company"), held of record by the undersigned on February 22, 2000, at
the Special Meeting of Shareholders to be held on April 14, 2000 and any
postponements or adjournments thereof.
1. To approve the Stock Purchase Agreement between the Company and
Spescom Limited and the transactions contemplated thereby.
/ / FOR
/ / AGAINST
/ / ABSTAIN
2. To amend the Company's Articles of Incorporation to increase the
number of authorized shares of Common Stock from 30,000,000 to
40,000,000.
/ / FOR
/ / AGAINST
/ / ABSTAIN
PLEASE DATE, SIGN ON REVERSE SIDE AND RETURN IN THE ACCOMPANYING ENVELOPE.
<PAGE>
[Reverse Side of Proxy]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS INDICATED; HOWEVER, IF NO INSTRUCTIONS ARE GIVEN, THE PROXIES
WILL VOTE THE SHARES FOR APPROVAL OF THE STOCK PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND FOR APPROVAL OF THE AMENDMENT OF THE
ARTICLES OF INCORPORATION.
Do you plan to attend the meeting? / / YES / / NO
Please sign exactly as your
name appears on the stock
certificate(s). When shares are
held by joint tenants, both
should sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your full
title as such. If a
corporation, please sign in
full corporate name by the
president or other authorized
officer. If a partnership or
limited liability company,
please sign in the
partnership's or limited
liability company's name by an
authorized person.
DATED: , 2000
-----------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
Please mark, sign, date and return the Proxy Card promptly using the
enclosed envelope.
