<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15935
ALTRIS SOFTWARE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
-----------------------------------------------------
(Address of principal executive offices and zip code)
(858) 625-3000
---------------------------------------------------
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding at July 31, 2000: 30,280,065
--------------
Number of Sequentially Numbered Pages: 15
<PAGE>
ALTRIS SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Condensed Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION 16
</TABLE>
2
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,2000 December 31, 1999
------------ -----------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,023,000 $ 142,000
Receivables, net 490,000 355,000
Other current assets 94,000 92,000
------------ ------------
Total current assets 2,607,000 589,000
Property and equipment, net 363,000 436,000
Computer software, net 3,449,000 3,707,000
Other assets 24,000 249,000
------------ ------------
Total assets $ 6,443,000 $ 4,981,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,237,000 $ 1,507,000
Accrued liabilities 1,413,000 1,512,000
Notes payable -- 574,000
Deferred revenue 2,309,000 2,289,000
------------ ------------
Total current liabilities 4,959,000 5,882,000
Deferred revenue, long term portion 1,262,000 1,542,000
Other long term liabilities -- 1,223,000
Subordinated debt, net of discount -- 2,708,000
------------ ------------
Total liabilities 6,221,000 11,355,000
------------ ------------
Commitments and contingencies -- --
Mandatorily redeemable convertible preferred stock, $1,000 par value 3,000
shares authorized; 3,000 shares issued and
outstanding at December 31, 1999 -- 3,423,000
Shareholders' equity (deficit):
Common stock, no par value, 40,000,000 shares authorized;
30,253,065 and 13,101,734 issued and outstanding, respectively 74,021,000 63,097,000
Common stock warrants 718,000 718,000
Accumulated deficit (74,517,000) (73,612,000)
------------ ------------
Total shareholders' equity (deficit) 222,000 (9,797,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 6,443,000 $ 4,981,000
============ ============
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Licenses $ 440,000 $ 382,000 $ 680,000 $ 1,154,000
Services and other 1,246,000 1,140,000 2,673,000 2,753,000
------------ ------------ ------------ ------------
Total revenues 1,686,000 1,522,000 3,353,000 3,907,000
------------ ------------ ------------ ------------
Cost of revenues:
Licenses 273,000 285,000 550,000 590,000
Services and other 695,000 735,000 1,432,000 1,802,000
------------ ------------ ------------ ------------
Total cost of revenues 968,000 1,020,000 1,982,000 2,392,000
------------ ------------ ------------ ------------
Gross profit 718,000 502,000 1,371,000 1,515,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development 461,000 837,000 876,000 1,848,000
Marketing and sales 402,000 397,000 718,000 1,162,000
General and administrative 160,000 443,000 501,000 1,890,000
------------ ------------ ------------ ------------
Total operating expenses 1,023,000 1,677,000 2,095,000 4,900,000
------------ ------------ ------------ ------------
Loss from operations (305,000) (1,175,000) (724,000) (3,385,000)
Interest and other income 23,000 186,000 24,000 195,000
Interest and other expense (58,000) (149,000) (205,000) (312,000)
------------ ------------ ------------ ------------
Net loss $ (340,000) $ (1,138,000) $ (905,000) $ (3,502,000)
============ ============ ============ ============
Basic net loss per common share $ (.01) $ (.11) $ (.05) $ (.32)
============ ============ ============ ============
Diluted net loss per common share $ (.01) $ (.11) $ (.05) $ (.32)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per common share 24,812,000 11,616,000 18,968,000 11,616,000
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
--------------------------
2000 1999
---- ----
Cash flow from operating activities:
<S> <C> <C>
Net loss $ (905,000) $(3,502,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 573,000 1,547,000
Gain on sale of 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 (135,000) 309,000
Inventory -- 116,000
Other assets 223,000 38,000
Accounts payable (270,000) (432,000)
Accrued liabilities (99,000) 338,000
Deferred revenue (260,000) (134,000)
Other long term liabilities (64,000) (110,000)
----------- -----------
Net cash used in operating activities (937,000) (1,920,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (31,000) (11,000)
Purchases of software (211,000) --
Net proceeds from sale of interest in ASL -- 205,000
----------- -----------
Net cash provided by (used in) investing activities (242,000) 194,000
----------- -----------
Cash flows from financing activities:
Repayments under notes payable (894,000) (193,000)
Proceeds from note payable 225,000 --
Proceeds from issuance of common stock 3,700,000 1,800,000
Proceeds from exercise of stock options 29,000 1,000
----------- -----------
Net cash provided by financing activities 3,060,000 1,608,000
----------- -----------
Effect of exchange rate changes on cash -- 10,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,881,000 (108,000)
Cash and cash equivalents at beginning of period 142,000 530,000
----------- -----------
Cash and cash equivalents at end of period $ 2,023,000 $ 422,000
=========== ===========
Supplemental cash flow information:
Interest paid $ 141,000 $ 213,000
=========== ===========
Schedule of noncash financing activities:
Accretion of dividends on mandatorily redeemable
convertible preferred stock $ 133,000 $ 210,000
=========== ===========
Settlement of liability from shareholder suit $ 1,128,000 $ --
=========== ===========
Conversion of preferred stock to common stock $ 3,423,000 $ --
=========== ===========
Conversion of subordinated debt to common stock $ 2,708,000 $ --
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ALTRIS SOFTWARE, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - 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, 1999. 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 June
30, 2000 and the consolidated statements of operations and of cash flows for the
six month periods ended June 30, 2000 and 1999 are unaudited. The consolidated
financial statements and related notes have been prepared in accordance with
generally accepted accounting principles applicable to interim periods. In the
opinion of management, the consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the consolidated financial position, operating results and
cash flows for the periods presented.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company, to date, has not engaged in derivative and hedging
activities, and accordingly does not believe that the adoption of SFAS No. 133
will have a material impact on the financial reporting and related disclosures
of the Company. The Company will adopt SFAS No. 133 as required by SFAS No. 137,
"Deferral of the Effective Date of the FASB Statement No.
133," for fiscal 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of the operations of the Company.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of certain of the provisions of FIN 44 prior to March 31,
2000 did not have a material impact on the financial statements. Management does
not expect that the adoption of the remaining provisions will have a material
effect on the financial statements.
6
<PAGE>
NOTE 3 - SPESCOM TRANSACTION AND RELATED PARTIES
In May 1999, the Company completed a transaction with Spescom Ltd.
("Spescom"), whereby Spescom invested $1,800,000 for 2,000,000 shares of the
Company's common stock. In addition, as part of the transaction, Spescom paid
the Company an additional $1,000,000 and invested $1,200,000 directly into
the Company's former United Kingdom subsidiary, Altris Software Ltd. ("ASL")
for a 60% ownership interest in ASL. In conjunction with the transaction, the
Company contributed $400,000 into ASL and retained a 40% interest in ASL. As
of June 30, 2000 the Company has deferred $125,000 of the proceeds for
potential warranty claims.
In addition, the Company entered into a distribution agreement with ASL
which grants ASL exclusive distribution rights for the Company's products around
the world, excluding North and South America and the Caribbean. Under this
distribution agreement, this exclusivity is contingent upon ASL meeting certain
minimum royalty commitments beginning in 2002. The agreement provides for a
royalty to the Company on sales of the Company's products by ASL. For the three
and six months ended June 30, 2000 royalties to the Company totaled $112,000 and
$193,000, respectively. The Company had a receivable from ASL in the amount of
$46,000 at June 30, 2000.
In April 2000, the Company completed another transaction with Spescom
to issue 5,285,714 shares of common stock for $3,700,000 in cash. In addition,
the subordinated debt and preferred stock, along with related accrued interest
and dividends, was converted at the rate of $0.70 per share into 9,528,096
shares of common stock. As part of the transaction, the Company acquired for
$200,000 all the rights to Spescom's EMS 2000 software, a configuration
management product. The Company has also transferred its remaining 40%
share of ASL, with no remaining carrying value, to Spescom. As a requirement of
the transaction the Company's short term loans totaling $327,000 and its
revolving loans of $450,000 were repaid. As of June 30, 2000, the Company has a
liability of $165,000 to Spescom.
NOTE 4 - RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
Billed receivables $ 487,000 $ 424,000
Unbilled receivables 71,000 -
Less allowance for doubtful accounts (68,000) (69,000)
---------------- ----------------
$ 490,000 $ 355,000
================ ================
</TABLE>
7
<PAGE>
NOTE 5 - 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 six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Loss Used:
<S> <C> <C> <C> <C>
Net loss $ (340,000) $ (1,138,000) $ (905,000) $ (3,502,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (28,000) (105,000) (133,000) (210,000)
------------ ------------ ------------ ------------
Net loss used in computing basic and
diluted net loss per share $ (368,000) $ (1,243,000) $ (1,038,000) $ (3,712,000)
============ ============ ============ ============
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 24,812,000 11,616,000 18,968,000 11,616,000
============ ============ ============ ============
</TABLE>
NOTE 6 - 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.
Revenues for the three and six months ended June 30, 2000 and 1999 by
customer location are as follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $1,551,000 $1,442,000 $3,127,000 $3,057,000
Europe, primarily United Kingdom 124,000 53,000 211,000 743,000
Other International 11,000 27,000 15,000 107,000
---------- ---------- ---------- ----------
$1,686,000 $1,522,000 $3,353,000 $3,907,000
========== ========== ========== ==========
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 1999.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
Revenues
Revenues for the three and six months ended June 30, 2000 were
$1,686,000 and $3,353,000, respectively, as compared to $1,522,000 and
$3,907,000 for the three and six months ended June 30, 1999.
For the three months ended June 30, 2000 revenues consisted of $440,000
(26%) in software licenses and $1,246,000 (74%) related to services and other
revenue. This compares to software license revenues of $382,000 (25%) and
services and other revenue of $1,140,000 (75%) for the three months ended June
30, 1999. For the six months ended June 30, 2000 revenues consisted of $680,000
(20%) in software licenses and $2,673,000 (80%) related to services and other
revenues. This compares to $1,154,000 (30%) in software licenses and $2,753,000
(70%) related to services and other revenue for the six months ended June 30
1999.
Software license revenues increased $58,000 for the three month
period and decreased $474,000 for the six month period ending June 30, 2000
over the prior year. The increase for the three month period is due to new
sales of the Altris eB product, which began shipping for general availability
in late 1999. The decrease for the six-month period is attributable in part
to the 2000 revenues having included only license royalties from ASL as
compared to 1999 when the total operating results of ASL were included in
the Company's consolidated results through April 1, 1999. See Note 3 of the
Condensed Notes to the Financial Statements. In addition, management believes
that license orders in the first three months of 2000 were negatively
impacted by customers' uncertainty regarding the financial condition of the
Company and delays in purchasing patterns of customers who expended
significant resources to correct their software systems for Year 2000
compliance.
Revenues generated from services increased $106,000 for the three
months and decreased $80,000 for the six-month period over the prior year.
The increase for the three-month period is attributed to the additional fees
being generated for upgrading existing customers from the Company's legacy
products to the new Altris eB product. The decrease for the six-month period
relates to service revenues from ASL that were included in the prior year's
consolidated results, whereas the current year operations do not include
these results. See Note 3 of the Condensed Notes to the Financial Statements.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue, although no customer accounted for
more than 10% of total revenue for the three and six months ended June 30, 2000
or 1999. One consequence of this dependence has been that revenue can fluctuate
significantly on a quarterly basis. The Company's reliance on relatively few
customers could have a material adverse effect on the results of its operations
on a quarterly basis. Additionally, a significant portion of the Company's
revenues has historically been derived from the sale of systems to new
customers.
Cost of Revenues
Cost of license revenues consists of costs associated with reselling
third-party software products and amortization of internal software
development costs. Gross profit from license revenues as a percentage of
license revenues was 38% and 19% for the three and six months ended June 30,
2000 compared to 25% and 49% for the three and six months ended June 30,
1999. The increase from 25% to 38% for the comparable three months is the
result of more sales of eB software versus other third party software being
greater in 2000 compared to 1999. The decrease in the gross profit margin
from licenses for the six month comparable figures was due principally to
increased
9
<PAGE>
amortization of software development costs in 2000 compared to 1999, due to the
Company's release of its eB product, combined with a decrease in revenues.
Cost of services and other revenues consists primarily of
personnel-related costs in providing consulting services, training to
customers and support. It also includes costs associated with reselling
third-party hardware and maintenance. Gross profit from services and other
revenue as a percentage of services and other revenue was 44% and 46%,
respectively, for the three and six months ended June 30, 2000 compared to
36% and 35%, respectively for the three and six months ended June 30, 1999.
The increase in the gross profit margin from services and other revenue was
due principally to decreased personnel costs associated with consulting
services and support.
The Company's software and services are sold at a significantly higher
margin than third party products which are resold at a lower gross profit
percentage in order for the Company to remain competitive in the marketplace for
such third party products. Gross profit percentages can fluctuate quarterly
based on the revenue mix of Company software, services and third party software
or hardware.
Operating Expenses
Research and development expense for the three and six months ended
June 30, 2000 was $461,000 and $876,000, respectively, as compared to $837,000
and $1,848,000 for the same periods in the prior year. The decrease in research
and development for the three and six months ended June 30, 2000 was due
primarily to a reduction in the number of development personnel and associated
costs combined with lower expenditures for third party development consultants.
Marketing and sales expense for the three and six months ended June 30,
2000 was $402,000 and $718,000, respectively, as compared to $397,000 and
$1,162,000 for the three and six months ended June 30, 1999. The slight increase
for the three-month period is due to additional personnel and associated costs.
The Company is currently increasing expenditures relating to sales and marketing
effort. The six-month decrease is primarily due to the exclusion of ASL from the
consolidated sales and marketing expense after April 1, 1999.
General and administrative expense was $160,000 and $501,000,
respectively, for the three and six months ended June 30, 2000 as compared to
$443,000 and $1,890,000 for the three and six months ended June 30, 1999.
General and administrative expense for the three months ended June 30, 2000
decreased due to a one-time credit relating to a waiver by the Company's Board
of Directors of payment in the second quarter for two years of accrued Board
fees. General and administrative expense has also decreased due to lower
personnel and associated costs. The decrease for the six-month period was
also the result of decreases in goodwill amortization and legal expense.
Settlement of shareholder lawsuits against the Company resulted in a decrease
in legal fees as compared to the prior year. In addition, since April 1, 1999
general and administrative expense has not included ASL's expenses.
Interest and other income were $23,000 and $24,000 for the three and
six months ended June 30, 2000 as compared to $186,000 and $195,000 for the
same period a year ago. The decrease is primarily due to the gain recorded on
the sale of the interest in ASL in the second quarter 1999. See Note 3 of the
Condensed Notes to the Consolidated Financial Statements.
Interest and other expense were $58,000 and $205,000, respectively, for
the three and six months ended June 30, 2000 versus $149,000 and $312,000 for
the three and six months ended June 30, 1999. The decrease was due to a lower
debt balance during the second quarter of 2000 as a result of the conversion of
the Company's subordinated debt into common stock and pay-off of its banking
facilities as part of the Spescom transaction.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's cash and cash equivalents totaled
$2,023,000 as compared to $142,000 at December 31, 1999, and its current ratio
was .5 to 1.
For the six months ended June 30, 2000, cash used in operating and
investing activities totaled $937,000 and $242,000, respectively, while cash
provided by financing activities totaled $3,060,000. Cash provided by financing
activities was generated primarily from the issuance of common stock as part of
the Spescom transaction in April 2000 (See Note 3 of the Condensed Notes to the
Consolidated Financial Statements).
Net Operating Loss Tax Carryforwards
As of December 31, 1999, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $52,717,000
and $8,294,000, respectively which expires over the years 2000 through 2019. In
addition, the Company generated but has not used research and investment tax
credits for federal income tax purposes of approximately $1,150,000, which will
substantially expire in the years 2000 through 2005. Under the Internal Revenue
Code of 1986, as amended (the "Code"), the Company generally would be entitled
to reduce its future Federal income tax liabilities by carrying unused NOL
forward for a period of 15 to 20 years to offset future taxable income earned,
and by carrying unused tax credits forward for a period of 15 years to offset
future income taxes.
The Company's ability to utilize any NOL and credit carryforwards in
future years may be restricted in the event the Company undergoes an "ownership
change," generally defined as a more than 50 percentage point change of
ownership by one or more statutorily defined "5-percent stockholders" of a
corporation, as a result of future issuances or transfers of equity securities
of the Company within a three-year testing period. In the event of an ownership
change, the amount of NOL attributable to the period prior to the ownership
change that may be used to offset taxable income in any year thereafter
generally may not exceed the fair market value of the Company immediately before
the ownership change (subject to certain adjustments) multiplied by the
applicable long-term, tax-exempt rate announced by the Internal Revenue Service
in effect for the date of the ownership change. A further limitation would apply
to restrict the amount of credit carryforwards that might be used in any year
after the ownership change. As a result of these limitations, in the event of an
ownership change, the Company's ability to use its NOL and credit carryforwards
in future years may be delayed and, to the extent the carryforward amounts
cannot be fully utilized under these limitations within the carryforward
periods, these carryforwards will be lost. Accordingly, the Company may be
required to pay more Federal income taxes or to pay such taxes sooner than if
the use of its NOL and credit carryforwards were not restricted.
In April 2000, the Company completed a share issuance to Spescom as
a result of which Spescom owns approximately 60% of the voting control of the
Company. Since Spescom has now acquired its entire majority interest in the
Company within one year, an "ownership change" under the Code has occurred.
Thus, the Company's ability to use its NOL and credit carryforwards in future
years will be delayed and, to the extent the carryforward amounts could not
be fully utilized under the limitations discussed above within the
carryforward periods, these carryforwards would be lost. Accordingly, if the
Company generates net income in future years, the Company will be required to
pay more Federal income taxes or to pay such taxes sooner than if the use of
its NOL and credit carryforwards were not restricted.
In connection with the acquisition of Optigraphics, the Company
acquired Optigraphics' net operating losses which are limited to offset against
that entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. In the six months ended June 30,
2000, revenue from the United States, Europe and other locations in the world
were 93%, 6% and 1%, respectively. This compares to 78%, 19% and 3%,
respectively for
11
<PAGE>
the same period in 1999. The European currencies have been relatively stable
against the U.S. dollar for the past several years. As a result, foreign
currency fluctuations have not had a significant impact on the Company's
revenues or results of operations. Changes in foreign currency rates, the
condition of local economies, and the general volatility of software markets may
result in higher or lower proportion of foreign revenues in the future. Although
the Company's operating and pricing strategies take into account changes in
exchange rates over time, there can be no assurance that future fluctuations in
the value of foreign currencies will not have a material adverse effect on the
Company's business, operating results and financial condition.
Inflation
The Company believes that inflation has not had a material effect on
its operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
Year 2000 Compliance
Many currently installed computer systems and software products were
coded to accept only two digit entries in the date code field; however, these
date code fields need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' computer systems
and/or software were required to be upgraded or replaced to comply with such
"Year 2000" requirements.
The Company has completed a program, to review the Year 2000 compliance
status of the software and systems used in its internal business processes, to
obtain appropriate assurances of compliance from the manufacturers of these
products and agreement to modify or replace all non-compliant products. The
Company did address all issues identified prior to Year 2000 and did not
encounter any material difficulties.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company has tested all of its legacy products and
believes that its software products are generally Year 2000 compliant, meaning
that the use or occurrence of dates on or after January 1, 2000 will not
materially affect the performance of the Company's software products with
respect to four digit date dependent data or the ability of such products to
correctly create, store, process and output information related to such date
data. The Company did not encounter any significant Year 2000 problems for the
change from 1999 to 2000. However, there can be no assurances that the Company's
current products do not contain undetected errors or defects associated with
date functions. To the extent the Company's software products are not fully Year
2000 compliant, there can be no assurance that the Company's software products
contain all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates. In
addition, in certain circumstances, the Company has warranted that the use or
occurrence of dates on or after January 1, 2000 will not adversely affect the
performance of the Company's products with respect to four digit date dependent
data or the ability to create, store, process and output information related to
such data. If any of the Company's licensees experience Year 2000 problems, such
licensees could assert claims for damages against the Company. In addition, some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and the Company is aware of lawsuits against
other software vendors. Because of the unprecedented nature of such litigation,
it is uncertain to what extent the Company may be affected by it.
In addition, management believes that future purchasing patterns of
customers and potential customers have been affected by Year 2000 issues, with
many companies expending significant resources to correct their software systems
for Year 2000 compliance. These expenditures have reduced funds available to
purchase software products such as those offered by the Company.
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PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held April 14, 2000. At the
meeting the shareholders approved 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 shares. The proposal was approved with 6,776,411
proxies voting for, 485,832 voting against, and 20,637 abstaining. The
shareholders also approved the Stock Purchase Agreement, dated as of January 14,
2000, between the Company and Spescom Limited and the transactions contemplated
thereby, including the sale of a controlling interest in the Company to Spescom.
The proposal was approved with 7,144,813 proxies voting for, 485,832 voting
against, and 20,637 abstaining.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTRIS SOFTWARE, INC.
By: /s/ John W. Low
-----------------------------
John W. Low
Chief Financial Officer
Dated: August 14, 2000
--------------------------
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