<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:
/ / Preliminary Proxy Statement / / Confidential, For Use of
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ 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
March 14, 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
March 14, 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
<PAGE>
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.
2
<PAGE>
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 February 14, 2000, 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 *
Pierre de Wet............................ 24,500 * 24,500 *
John W. Low.............................. 107,750 * 107,750 *
Mark C. Schneider........................ 15,625 * 15,625 *
W. Alan Turner........................... 55,125 * 55,125 *
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 (9 persons)................ 894,298 6.7% 894,298 3.2%
</TABLE>
- ----------
* Less than one percent.
(1) Amounts and percentages include shares of Common Stock that may be acquired
within 60 days of February 14, 2000 through the exercise of stock options
as follows: 71,250 shares for Mr. Erickson, 24,500 shares for Mr. de Wet,
60,750 shares for Mr. Low, 15,625 shares for Mr. Schneider, 24,125 shares
for Mr. Turner, 7,500 shares for Mr. McGovern, 7,500 shares for
Mr. Unruh, 7,500 shares for Mr. Atkinson and 218,125 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
<PAGE>
(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.
MANAGEMENT
BOARD OF DIRECTORS
The following table sets forth certain information concerning each current
director of the Company along with information regarding Hilton Isaacman and
Johan Leitner, affiliates of Spescom who would replace Messrs. McGovern and
Atkinson on the Board upon consummation of the transactions contemplated by the
Stock Purchase Agreement with Spescom:
<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
Michael J. McGovern..................... 71 Director(1)
Martin P. Atkinson...................... 53 Director(1)
Hilton Isaacman......................... 46 Nominated Director(2)
Johan Leitner........................... 46 Nominated Director(2)
</TABLE>
- ---------------
(1) To resign upon consummation of the transactions contemplated by the Stock
Purchase Agreement with Spescom.
(2) To be appointed to the Board upon consummation of the transactions
contemplated by the Stock Purchase Agreement with Spescom to fill the
vacancies created by the resignations of Messrs. McGovern and Atkinson.
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 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.
4
<PAGE>
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. MCGOVERN has served as a Director of the Company since he founded the
Company in February 1981, and served as the Company's Chairman and Chief
Executive Officer from its inception until December 1987. Mr. McGovern was a
founder of Autologic, Inc. in 1968, where he was Vice President of Engineering
in charge of developing computer driven photo typesetters for the newspaper and
publishing industries. Mr. McGovern also serves as a director of Qtel, Inc.
(since March 1997) and as a director of Alpha Data Tech. (since April 1997). He
received a B.S.E.E. degree from City University of New York in 1952 and an
M.S.E.E. degree from Arizona State University in 1959.
MR. ATKINSON has served as a Director of the Company since 1997. Mr.
Atkinson presently runs a consulting firm based in Kent, England that advises
middle-market companies on banking and corporate finance matters. Prior to
establishing his consulting firm, Mr. Atkinson was employed by Lloyds Bank for
28 years until his retirement from there (at the senior executive level) in
December 1996. While at Lloyds, Mr. Atkinson was the Head of Risk Control of
Lloyds Merchant Bank Limited, a Director of Lloyds' Capital Markets Group, where
he was responsible for arranging several multi-million pound syndicated loans,
and from 1992 to 1996, he was responsible for Lloyds' middle-market activities
in certain counties in England. Mr. Atkinson is an Associate of the Institute of
Bankers, England. He received a law degree from Nottingham University in England
in 1968.
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.
5
<PAGE>
EXECUTIVE OFFICERS
The following table and discussion set forth certain information with
regard to the Company's current executive officers.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------ ------------- -------------------------------------
<S> <C> <C>
Roger H. Erickson................... 43 Chief Executive Officer
Pierre de Wet....................... 36 Vice President, Operations
John W. Low......................... 42 Chief Financial Officer and Secretary
Mark C. Schneider................... 41 Vice President, Engineering
W. Alan Turner...................... 48 Vice President, Marketing
</TABLE>
Biographical information for MR. ERICKSON is set forth above.
MR. DE WET was appointed Vice President of Operations in September 1999.
Previously, Mr. DeWet served as Director of Operations from April 1998 to
September 1999 and Director of Projects from May 1997 to April 1998. Prior to
joining Altris, Mr. DeWet was a Technical Marketing Manager at Paradigm System
Technology from June 1995 to April 1997 where he was responsible for
establishing relationships with technical partners in Europe and North America.
From April 1991 to June 1995, Mr. DeWet was with PQ Africa, a division of
Comparex Holdings. Mr. DeWet earned his B.S. from the University of Pretoria in
1989.
MR. LOW has served as Chief Financial Officer and Secretary since June
1990. Previously, Mr. Low had served as Corporate Controller since joining the
Company in August 1987. From 1980 until joining the Company, Mr. Low was with
Price Waterhouse LLP, most recently as a Manager working with middle-market and
growing companies. Mr. Low, who is a certified public accountant, earned a B.A.
degree in Economics from the University of California, Los Angeles in 1978.
MR. SCHNEIDER was appointed Vice President of Engineering in January 2000.
He has held many positions since joining the Company in 1985 as an Electronic
Design Engineer. From June 1999 to January 2000, Mr. Schneider served as acting
Vice President of Engineering until his formal appointment. Previously, Mr.
Schneider was Senior Software Engineer from 1998 to 1999 and Project Lead from
1996 to 1997. Prior to 1996, Mr. Schneider served as a Manager of Workstation
Products and Software Engineer. Before joining the Company, Mr. Schneider was an
Electronic Design Engineer with Teledyne Electronics. Mr. Schneider earned a
Bachelor of Science degree in Electrical Engineering from California State
University, Northridge in 1981.
MR. TURNER was appointed Vice President of Marketing in March of 1998.
Since joining the Company, Mr. Turner served as Vice President of Channel Sales
from 1997 to 1998 and as Business Development Director from 1993 to 1997.
Previously, Mr. Turner was in the offshore oil industry, heading teams of
engineers in product design, analysis and testing. Mr. Turner received a BSc
degree in Mechanical Engineering from Heriot-Watt University, Edinburgh,
Scotland in 1974, and received a postgraduate degree in Engineering Design from
Loughborough University, England in 1977.
6
<PAGE>
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information concerning the annual
and long-term compensation for services rendered in all capacities to the
Company for the three years ended December 31, 1999 of (i) the Company's Chief
Executive Officer and (ii) the five other most highly compensated executive
officers having compensation of $100,000 or more during 1999 (collectively, the
"NAMED EXECUTIVE OFFICERS").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------- LONG-TERM
OTHER COMPENSATION
ANNUAL AWARDS--
COMPENSATION STOCK OPTIONS
NAME AND POSITION YEAR SALARY($) BONUS($) ($)(1) (# SHARES)
- ---------------------------------- -------- ----------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Roger H. Erickson 1999 $196,999(2) $50,000 - 55,000
Chief Executive Officer 1998 164,635 - $131,215(3) 65,000
1997 174,708 9,000 - -
Steven D. Clark 1999 $102,842 - - -
Former Vice President - 1998 125,200 - $14,067(7) 38,000
Sales(5) 1997 168,462 $25,000 - 40,000
Pierre de Wet 1999 $112,692 $3,500 - 52,000
Vice President -- Operations 1998 106,450 - - 23,000
1997 54,596 - - -
John W. Low 1999 $147,000(2) $7,000 - 47,000
Chief Financial Officer 1998 147,000 - $100,245(4) 28,000
and Secretary 1997 149,639 - - -
Mark C. Schneider 1999 $101,847 - - 46,500
Vice President - 1998 93,981 - - -
Engineering(6) 1997 82,580 - - 2,000
Alan Turner 1999 $112,465 $3,500 - 54,500
Vice President -- Marketing 1998 104,759 - - 20,000
1997 109,992 30,000 - -
</TABLE>
- -----------
(1) Excludes compensation in the form of other personal benefits, which, other
than as set forth in the table above, did not exceed the lesser of $50,000
or 10% of the total annual salary and bonus reported for each year.
(2) The 1999 salary for Mr. Erickson and Mr. Low includes $27,692 and $8,654,
respectively, of which they voluntarily deferred payment until 2000 to
assist the Company in managing its cash flow.
(3) This comprises (i) $105,843 relating to forgiveness of a promissory note
that had been made by Mr. Erickson in favor of the Company in connection
with his exercise of stock options that were due to expire and (ii) $25,372
in commissions paid in 1998 relating to Mr. Erickson's position as Vice
President, Strategic Partners in 1997.
(4) This comprises (i) $70,562 relating to forgiveness of a promissory note
that had been made by Mr. Low in favor of the Company in connection with
his exercise of stock options that were due to expire and (ii) a $29,683
payment for accrued vacation.
7
<PAGE>
(5) Mr. Clark resigned from the Company in August 1999. The bonus paid in 1997
related to services provided in 1996 as Director of U.S. Sales.
(6) Mr. Schneider was appointed an executive officer of the Company in January
2000. From June 1999 until his appointment, Mr. Schneider served as acting
Vice President of Engineering.
(7) These payments were for sales commissions.
OPTION GRANTS IN 1999
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------- ------------- ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Erickson.... 20,000(3) 3% $0.75 5/10/09 $9,433 $23,906
35,000(4) 5% $0.56 11/15/09 $12,370 $31,349
Steven D. Clark...... - - - - - -
Pierre de Wet........ 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
32,000(4) 4% $0.56 11/15/09 $11,310 $28,662
John W. Low.......... 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
27,000(4) 4% $0.56 11/15/09 $9,543 $24,183
Mark C. Schneider.... 6,000(6) 1% $0.35 1/20/09 $1,321 $3,347
5,000(5) 1% $0.50 8/5/09 $1,572 $3,984
35,500(4) 5% $0.56 11/15/09 $12,547 $31,797
W. Alan Turner....... 20,000(5) 3% $0.50 8/5/09 $6,289 $15,937
34,500(4) 5% $0.56 11/15/09 $12,194 $30,901
</TABLE>
- ----------------
(1) All options were granted with an exercise price equal to the closing sale
price of the Common Stock as reported on the OTC Bulletin Board on the date
of grant.
(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of its Common Stock.
The actual value, if any, which a Named Executive Officer may realize upon
the exercise of stock options will be based upon the difference between the
market price of the Common Stock on the date of exercise and the exercise
price.
(3) Options were granted in May 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
(4) Options were granted in November 1999. The options vest 25% 90 days from
the date of grant and in additional annual installments of 25% commencing
on the first anniversary of the date of grant.
(5) Options were granted in August 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
(6) Options were granted in January 1999. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
8
<PAGE>
AGGREGATED OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table sets forth for the Named Executive Officers information
with respect to unexercised options and year-end option values, in each case
with respect to options to purchase shares of the Company's Common Stock. Other
than Steven D. Clark, who acquired 30,000 shares upon the exercise of options
and realized a value of $11,250 (based upon the market price of $0.625 per share
on November 9, 1999, the date of exercise), the Named Executive Officers did not
exercise any options in 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
HELD AS OF DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
------------------------------- -------------------------------
NAME EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- ------------------------------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Roger H. Erickson................ 62,500 57,500 $24,098 $6,158
Steven D. Clark.................. 0 0 0 0
Pierre De Wet.................... 16,500 58,500 $4,972 $12,144
John W. Low...................... 64,000 46,000 $10,822 $7,854
Mark Schneider................... 5,250 44,750 $918 $8,105
W. Alan Turner................... 15,500 59,500 $4,833 $12,395
</TABLE>
- ----------
(1) Based on the closing sale price of the Common Stock on the OTC Bulletin
Board on December 31, 1999 ($0.72 per share).
BOARD COMMITTEES AND ATTENDANCE AT MEETINGS
The Board of Directors has an Audit Committee which makes recommendations
regarding the selection of independent public accountants and reviews with them
the scope and results of the audit engagement. The Audit Committee, which is
comprised of Messrs. McGovern, Unruh and Atkinson, held two meetings during
1999.
The Board of Directors also has a Compensation Committee which reviews
compensation of officers. The Compensation Committee, which is comprised of
Messrs. McGovern, Hamilton and Atkinson, held one meeting in 1999.
In addition, the Board of Directors has a Stock Option Committee which
generally administers the Company's Amended and Restated 1996 Stock Incentive
Plan. The Stock Option Committee, which is comprised of Messrs. McGovern, Unruh
and Hamilton, held one meeting in 1999.
The Board of Directors does not have a standing Nominating Committee or any
other committee which performs a similar function.
In 1999, the Board of Directors held 10 meetings. Each director attended at
least 75% of the aggregate of (i) the total number of meetings of the Board held
during the period for which he was a director and (ii) the total number of
meetings held by all committees of the Board on which he served during the
period he served.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT")
requires the Company's executive officers and directors and persons who own more
than 10% of the Company's common stock to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the
10
<PAGE>
Securities and Exchange Commission (the "SEC"). Executive officers, directors
and 10% shareholders are required by the SEC to furnish the Company with copies
of all Forms 3, 4 and 5 that they file.
Based solely on the Company's review of the copies of such forms it has
received and representations from certain reporting persons that they were not
required to file a Form 5 for specified fiscal years, the Company believes that
all of its executive officers, directors and greater than 10% shareholders have
complied with all of the filing requirements applicable to them with respect to
transactions during 1999, except that Form 3s were not timely filed for Mr.
Turner and Mr. de Wet, though they have been subsequently filed.
COMPENSATION OF DIRECTORS
Each director, other than directors who are also employees of the Company
or are precluded from accepting a fee by their employers, receives a $5,000
annual fee plus a $1,000 meeting fee for four paid meetings a year. In addition,
each director is reimbursed for all reasonable expenses incurred in connection
with attendance at such meetings. As a result of the Company's current cash
constraints, the directors have agreed to the deferral of all annual and meeting
fees until the Company's financial position improves. Directors who are
employees of the Company are not compensated for serving as directors.
Mr. Unruh, a director, provided consulting services to the Company in 1999
for which he received $5,244.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1999, the Compensation Committee of the Board of Directors was comprised
of three members, Messrs. McGovern, Hamilton and Atkinson, none of whom is or
was an employee or officer of the Company in 1999. No executive officer of the
Company has served as a member of the Board of Directors or Compensation
Committee of any company in which Messrs. McGovern, Hamilton and Atkinson is an
executive officer.
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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.
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 (1) the 11.5% Subordinated Debenture
in the principal amount of $3,000,000 issued by the Company on
June 27, 1997 (the "DEBENTURE") and (2) 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").
Spescom acquired the Finova Instruments from Finova Mezzanine
Capital, Inc. on December 9, 1999 for approximately $1.25
million plus the transaction costs, including legal fees of
counsel for Finova Mezzanine Capital, Inc. 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. This exchange of
9,528,096 shares of Common Stock for the Debenture and
Preferred Stock will have no general effect upon the rights of
the Company's other shareholders. The Company and Spescom used
a price of $0.70 per share in determining the number of shares
to be issued to Spescom upon exchange and cancellation of the
Debenture and the Preferred Stock;
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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. The Spescom
EMS 2000 product provides configuration management capabilities
and engineering change management control. As industries face
greater regulatory pressures, the ability to extend the
Company's document management product with configuration
management will be beneficial to the Company and should create
a market differentiation for the Company. Ownership of the EMS
2000 code will allow a tighter degree of integration between
the Company's and Spescom's products, thereby enabling the
delivery of a single solution to the Company's customers;
- 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. Altris U. K. operates primarily as a sales and
customer support office under an exclusive distribution
agreement for the Company's products around the world excluding
North and South America and the Caribbean. For the year ended
December 31, 1999 Altris U.K. recorded revenues of $3,253,000
and a net loss of $1,324,000. As of April 1, 1999 the net book
value of the Company's investment in Altris U.K., which is
accounted for under the equity method, was $0. The Company is
not responsible for funding the continued losses of Altris U.K.
nor does it intend to provide any additional capital to Altris
U.K. Thus, the Company has not recorded any losses relating to
Altris U.K. since the sale of the 60% interest in Altris U.K.
to Spescom effective April 1, 1999; 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.
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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
Each of the Company and Spescom has made customary representations
and warranties for a transaction of this type. See Articles 4 and 5 of the
Stock Purchase Agreement for further details regarding these representations
and warranties.
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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)
The reason for keeping the Segregated Funds in a separate bank
account is to enable Spescom, through its nominees to the
Company's Board of Directors, to monitor how the Company spends
the Segregated Funds on certain matters that are not
contemplated by the annual budget. The Segregated Funds the
Company plans to expend as part of the approved annual budget
will be classified as "cash" in the current assets section of
the Company's balance sheet. Funds in excess of the planned
expenditures in the approved annual budget plan will be
classified as "restricted cash" in the long term assets section
of the Company's balance sheet.
- 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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- 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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- 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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- 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)
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:
- LIQUIDITY AND WORKING CAPITAL: 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,
- FINANCIAL POSITION: by retiring the Debenture and the Preferred
Stock in exchange for the issuance of Common Stock, the Company
would significantly strengthen its balance sheet by replacing
$6 million principal amount of debt and preferred stock (a
debt-like instrument) with common equity; management believes
the Company's improved financial position will make its
products and services more attractive to potential customers
who may have been hesitant to conduct business with the Company
given its current financial position, and
- STRATEGIC RELATIONSHIP: 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.
22
<PAGE>
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
23
<PAGE>
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 reviewing the terms of the proposed transaction, Broadmark
reviewed the number of shares to be outstanding after the Spescom transaction
and the ownership position that Spescom would have in the Company after the
transaction. In analyzing the fairness of the proposed transaction, Broadmark
considered the controlling ownership position obtained by Spescom in the
proposed transaction and the related premium typically associated with such a
control ownership position. Broadmark also reviewed the separate transactions
involving the acquisition and subsequent conversion of $3,000,000 in the
Company's Subordinated Debt, $3,000,000 in Convertible Preferred Stock and
$669,667 in accrued dividends into Common Stock. Broadmark analyzed the
impact of these transactions on the Company's financial risk and ability to
attract capital. Further, Broadmark analyzed the $3.7 million investment by
Spescom for 5,285,714 shares of common stock and its impact on the Company's
financial position and risk. Broadmark also analyzed the impact of the
segregated funds received in the $3.7 million investment by Spescom. Based in
part on a review of the terms of the proposed transaction, it is Broadmark's
opinion that the proposed transaction is fair, from a financial point of view.
In reviewing publicly available information concerning the Company
and its holdings, Broadmark reviewed the Company's filings with the SEC,
including the Company's quarterly and annual statements. It further reviewed
Company press releases and public information pertaining to the Company's
products, white papers, customers, technology and organizational structure.
Within these public documents, Broadmark reviewed the competitiveness of the
Company's products, the Company's historical financial statements and the
Company's results of operations including recurring losses, declining sales,
reduced payroll costs, financial risk, interests in Altris U.K., the May 1999
Spescom $1.8 million investment in the Company for 2,000,000 shares of common
stock and an investment by Spescom for a control position in Altris U.K.
Broadmark analyzed the proposed transaction and its impact on the Company's
financial risk and ability to raise additional capital, as well as the
resulting impact on the Company's product development and competitiveness.
Based in part on a review of this publicly available information, it is
Broadmark's opinion that the proposed transaction is fair, from a financial
point of view.
In reviewing certain publicly available information concerning
certain other companies engaged in businesses generally comparable to the
Company's, Broadmark reviewed the historical financial performance and market
values of nine companies it deemed generally comparable to the Company.
Broadmark reviewed the product and service offerings of these companies as
well as their sales growth and capital resources. Broadmark also reviewed the
Company's price/sales ratio and enterprise value to those of the comparable
companies. The valuation multiples derived from the comparable companies were
used in part to derive a fair value for Altris in the proposed transaction.
Broadmark also reviewed the liquidity ratios and market value ratios of the
Company and analyzed them in comparison to the average and median ratios for
the comparable companies. Based in part on this analysis, it is Broadmark's
opinion that the proposed transaction is fair, from a financial point of view.
In reviewing other studies and economic and market data, Broadmark
reviewed forecasts on the knowledge management, document management and
Application Service Provider (ASP) industries. Broadmark considered the
opportunities and growth projected within these industries that directly
relate to the Company and its products. Broadmark also analyzed the
competitive nature of these industries and analyzed the software licensing
and ASP business models within these industries. Broadmark analyzed the
impact of the proposed transaction on the Company's financial risk and the
effect of this impact on the Company's ability to gain market share, compete
with well funded competitors, and successfully sell its products. Broadmark
also reviewed reports pertaining to the historical discounts and other
adjustments to fair market value estimates based upon acquisitions and
investments resulting in control positions. Broadmark considered these
historical premiums in determining the fairness of the proposed transaction.
Based in part on this analysis, it is Broadmark's opinion that the proposed
transaction is fair, from a financial point of view.
In reviewing financial and operating information furnished by the
Company, Broadmark reviewed descriptions of the Company's debentures and
classes of stock and status thereof, financial projections, and descriptions
pertaining to the Company's EB and DocDepo product lines. In reviewing this
information Broadmark considered the effect of the transaction on the current
status of the debentures and classes of stock, including the Company's
default status of certain covenants on the Series E Convertible Preferred
Stock, the conversion of the Series E Convertible Preferred Stock, and the
liquidation preference of the Series E Convertible Preferred Stock. Broadmark
reviewed the Company's financial projections, and under certain assumptions
Broadmark developed a discounted cash flow analysis. Broadmark analyzed the
impact of the proposed transaction on the Company's financial risk,
probability of attaining its financial projections, and ability to further
develop its products, provide services and attract customers. Based in part
on this analysis, it is Broadmark's opinion that the proposed transaction is
fair, from a financial point of view.
In reviewing the trading history of the Company's common stock,
Broadmark analyzed the price per share of the Company's common stock as of
the date of the Fairness Opinion with the range of historical values of the
common stock. Broadmark compared the Company's common stock price per share
as of the valuation date as well as the consideration to be paid in the
proposed transaction with an average trailing trading range and determined
whether or not these values were above or below the average trailing trading
range. Based in part on this analysis, it is Broadmark's opinion that the
proposed transaction is fair, from a financial point of view.
In reviewing comparable transactions, Broadmark searched for and
identified transactions involving companies generally comparable to Altris.
Of these identified transactions, transaction multiples were only found
available for one comparable transaction. Broadmark considered the comparable
price-to-sales ratio and control premium paid in this transaction in
determining the fairness of the proposed transaction. In addition, Broadmark
reviewed the May 14, 1999 transaction between Spescom and Altris in which
Spescom invested approximately $1.8 million for approximately two million
shares. In reviewing this transaction for a minority position, Broadmark
reviewed the price paid per share in relation to the share price of Altris'
common stock and the Company's financial position at the date of the
transaction, and the Company's sales and earnings growth and outlook, product
development and liquidity risk at the date of the transaction. Based in part
on this analysis, it is Broadmark's opinion that the proposed transaction is
fair, from a financial point of view.
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.
24
<PAGE>
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
25
<PAGE>
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.
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
26
<PAGE>
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 agreements 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 agreements contain certain
restrictive covenants, including those relating to (1) a minimum tangible net
worth ratio, (2) a maximum debt-to-tangible net worth ratio and (3) a minimum
level of liquidity. As of September 30, 1999, the Company was in violation of
all three of those 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. The
Company's current indebtedness to Merrill Lynch under the loan agreements is
approximately $400,000. If the Company is not able to obtain the consent of
Merrill Lynch to the proposed transactions, the Company might repay its
indebtedness to Merrill Lynch in full in order to retire the loan agreements
and proceed with the Spescom transactions.
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.
27
<PAGE>
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.
28
<PAGE>
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.
CERTAIN TRANSACTIONS
Messrs. Isaacman and Leitner, who will become directors of the
Company if the proposed transactions with Spescom are approved by the
Company's shareholders, are affiliates of Spescom. As discussed above, the
Company and Spescom concluded the May 1999 Transactions, whereby Spescom
purchased 2,000,000 shares of the Company's common stock for $1.8 million. In
addition, as part of the agreement, Spescom paid the Company an additional
$1.0 million and invested $1.2 million directly into Altris U.K. for a 60%
interest in Altris U.K. In conjunction with the agreement the Company
contributed $400,000 to Altris U.K. and retained a 40% ownership interest in
Altris U.K. The Company also applied $200,000 of the proceeds from the
transaction to fund an escrow account which was to 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 stock purchase
agreement, including any liability the Company may have under its
representations and warranties to Spescom in the agreement. The Company also
recorded a deferred gain of $200,000 relating to the funds escrowed. In
November 1999, Spescom released the $200,000 in escrow. The Company's
deferred gain is being recognized over the warranty period. In 1999, the
Company recorded a gain of $257,000, net of expenses on the transaction.
Other terms of the transaction included that Spescom has the right
to nominate one director to the Company's board of directors. In addition,
the shares of stock representing the Company's 40% interest in Altris U.K.
have been pledged to Spescom to secure the obligations of the Company to
Spescom, such pledge not to extend beyond the second anniversary of the
closing date.
In addition, the Company entered into a distribution agreement with
Altris U.K. which grants Altris U.K. 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
Altris U.K. 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 Altris U.K. In 1999 royalties to the Company totaled $188,000. At
December 31, 1999, the Company had a receivable from Altris U.K. in the
amount of $44,000.
As part of the May 1999 transaction, the Company became Spescom's
exclusive distributor of EMS 2000, Spescom's configuration management (CM)
product, in North and South America and the Caribbean. In 1999, the Company
purchased software and services from Spescom totaling $146,000. At December
31, 1999 the Company had a payable to Spescom of $50,000.
In addition, as discussed above, the Company borrowed $500,000 from
Spescom in September 1999 under a loan which was convertible into Common
Stock of the Company at Spescom's option on or before January 1, 2000 at
$0.35 per share. The Company issued 1,428,571 shares of Common Stock to
Spescom after Spescom elected to convert this loan.
Spescom acquired the Finova Instruments for approximately $1.25
million plus the transaction costs, including legal fees of counsel for
Finova Mezzanine Capital, Inc. The principle used by the Company to determine
to issue Spescom 9,528,096 shares of Common Stock in exchange for the Finova
Instruments was to convert the value of the Finova Instruments into Common
Stock at a valuation of $0.70 per share, the same valuation applied for the
issuance of 5,285,714 shares for $3,700,000 in cash.
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 and are being
delivered to the shareholders along with this proxy statement:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Amendment No. 1 to Annual Report on Form 10-K/A 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.
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.
29
<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;
A-4
<PAGE>
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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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.
A-22
<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
A-23
<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.
A-24
<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
A-25
<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;
B-1
<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
B-2
<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
B-3
<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.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
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 (IRS Employer
incorporation or organization) Identification No.)
9339 Carroll Park Drive, San Diego, CA 92121
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on of each class
Title of each class which registered
- ------------------- --------------------------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
----------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock on March 23, 1999,
held by non-affiliates* of the Registrant, based upon the last price reported on
the OTC Bulletin Board on such date was $9,614,663.
The number of shares outstanding of the Registrant's Common Stock at
the close of business on March 23, 1999, was 9,614,663.
*Without acknowledging that any individual director of Registrant is
an affiliate, all directors have been included as affiliates with respect to
shares owned by them.
<PAGE>
PART I
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" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in,
or incorporated by reference into, this report.
ITEM 1. BUSINESS
Altris Software, Inc. (the "Company") develops, markets and supports
a suite of three-tier client/server document management software products. These
products enable users in a broad range of industries to manage, share and
distribute critical business information, expertise and other intellectual
capital in an efficient manner. The Company's products provide several key
business benefits including interoperability and scalability across an
enterprise, an extensive range of product tools and features, quick
cost-effective implementation, increasing network efficiency using the Company's
targeted image extraction technology ("TIE-Technology-TM-") to substantially
reduce network bandwidth requirements and the ability to document-enable
existing applications. In addition, the open architecture of the Company's
products permits them to be used in a standardized fashion and enables
sophisticated customization and integration with existing business applications.
Unlike many of its competitors, the Company offers its own cohesive set of
software products which provide a complete electronic document management system
("EDMS") without the high systems integration costs that can be incurred when
disparate products from a variety of suppliers must be integrated.
The Company has historically sold its suite of products through its
direct sales force and through complementary indirect channels primarily
consisting of value-added resellers ("VARs"), systems integrators and original
equipment manufacturers ("OEMs"). The Company has established a strong market
presence in the utility, manufacturing, transportation and petrochemical and
other processing industries both domestically and internationally. The Company's
marketing efforts are focused on these industries as well as in certain other
select vertical markets, including telecommunication providers, defense and
other governmental agencies, electrical and electronic equipment manufacturers,
engineering and construction firms, property management companies and
architecture firms.
HISTORY
The Company was incorporated in California in 1981. Throughout the
mid 1980's, the Company focused on the development and manufacturing of
proprietary hardware components, as well as software, for EDMS. The Company's
systems at that time included a significant portion of imaging hardware
components developed and manufactured by the Company. In subsequent years, the
Company moved from proprietary hardware components for EDMS to open
architecture, client/server software systems, while also providing system
integration services. As part of this change, the Company implemented a
restructuring program that reduced costs and consolidated operations to a level
consistent with sales.
As a result of its early success, which generated a need for
additional capital to finance expected growth, the Company completed the initial
public offering of its common stock in June 1987, raising net proceeds of
approximately $19.6 million. In December 1991, seeking further financing to fund
expected growth, the Company issued common stock and warrants through a unit
offering. The Company received net proceeds of approximately $2,600,000 upon
issuing 750,000 units at a unit price of $4.25. In January 1992, the underwriter
in the unit offering exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. Each unit consisted of
two shares of the Company's common stock and one warrant to purchase one share
of common stock at an exercise price of $4.25. In 1995, such underwriter
exercised warrants which were issued to it in connection with the offering for
net proceeds of $382,000. Also in 1995, warrants were exercised for 459,446
shares of common stock, resulting in total proceeds to the Company of
$3,848,000.
1
<PAGE>
In September 1993, the Company acquired Optigraphics Corporation
("Optigraphics") for consideration valued at $8,400,000, comprised of $2,700,000
in cash, 1,120,559 shares of the Company's common stock and $1,734,000 in notes
which were paid in full in September 1995. Optigraphics, which was founded in
1982, provided software imaging solutions for enterprise systems, along with
traditional departmental systems. The Company was attracted to Optigraphics for
a number of factors, including the technology behind its sophisticated
workstation products, strong engineering organization, broad customer base,
including customers in the telecommunications industry, experienced national
sales force and international reseller distribution capabilities.
On December 27, 1995, the Company acquired United Kingdom-based
Trimco Group plc ("Trimco") for total consideration of $14,165,000. Trimco, at
the time of acquisition, was recognized as a leading developer of software
products for the capture, viewing, mark-up editing, storage, distribution and
workflow management of documents. The purchase price was comprised of $5,550,000
in cash, 857,394 shares of the Company's common stock and a convertible
promissory note having a total principal amount of $1,000,000 due September 27,
1996 with interest payable at 7% per annum. In addition, the purchase price
included obligations assumed which were payable to certain Trimco employees in
connection with the acquisition, consisting of cash of $1,051,000 and 50,300
shares of the Company's common stock. Trimco was incorporated in 1988 in the
United Kingdom and has its principal offices in Ealing, London. Trimco's
products focused on applications involving office documents as well as technical
documents such as engineering drawings and blueprints and were marketed
primarily through VARs, distributors and systems integrators. The Company's
purchase of Trimco brought the Company's total number of customers to
approximately 1,500 worldwide, representing major markets in utilities,
transportation, petrochemicals, manufacturing, construction, telecommunications
and media, government and financial services.
On October 24, 1996, the Company changed its name from Alpharel,
Inc. to "Altris Software, Inc." to better reflect the integration of the
Alpharel and Trimco organizations and products.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% Subordinated Debenture due June 27, 2002
with a principal amount of $3,000,000 (the "Subordinated Debenture") and
warrants to purchase additional shares of Common Stock. The aggregate gross
proceeds to the Company from the private placement before expenses were
$6,000,000. The Series D Preferred Stock bears a dividend of 11.5% per annum,
accruing quarterly, and is convertible into shares of the Company's common stock
at a conversion price of $6.00 per share (subject to reset on June 27, 1999 to
the average closing price of the common stock on the 20 trading days immediately
prior to June 27, 1999 if such average is less than $6.00 per share). The
Company may redeem any or all of the Series D Preferred Stock at its stated
value on or after June 27, 1999 at any time the 20-day average of the closing
price of the common stock equals or exceeds $9.50 per share, and the Company may
redeem any or all of the Series D Preferred Stock on or after June 27, 2002 at
its stated value irrespective of the trading price of its common stock. The
Subordinated Debenture, which was issued at 100% of par, provides for quarterly
interest payments and has a maturity date of June 27, 2002. In September 1998,
the Company agreed to grant the holder of the Subordinated Debenture a security
interest, second in priority to the Company's senior secured debt in
substantially all of the Company's assets. In addition, the interest payment
terms were amended to require monthly rather than quarterly payments. The
Company may prepay the Subordinated Debenture prior to maturity without penalty.
As the Company is currently in default under the Preferred Stock Purchase
Agreement as a result of non-payment of dividends due in 1998, the dividend rate
on the Series D Preferred Stock has increased to 14%. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters", and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources -- Certain Factors That May Affect
Future Results".
THE INDUSTRY
In today's marketplace, organizations are increasingly looking for
solutions to help manage their business information. Many companies are
overwhelmed by the amount and variety of information generated by their vendors,
customers, employees and consultants. As a result, organizations are seeking
computer-based information management solutions that enable them to improve
productivity, reduce costs, react
2
<PAGE>
quickly to changes in their marketplace, improve customer service or comply
with regulatory and quality certification requirements.
Relational database management systems ("RDBMS") from leading
companies such as Oracle, Microsoft, Sybase Inc. and others were developed to
enable companies to manage certain business information such as customer names,
addresses and phone numbers, sales and accounting records, billing information
and inventory records. This type of data is often referred to as "structured"
data and is generally entered and stored in tables consisting of rows and
columns. While RDBMS enable companies to better store, process and analyze their
structured data, it is not common for RDBMS to manage so-called "unstructured"
data.
Unstructured data includes information generated by most software
for personal computers and workstations, such as word processing documents,
spreadsheets and computer-aided design ("CAD") drawings, as well as other types
of information which may not be in electronic format, such as manufacturing
procedures, maintenance records, training and technical manuals, facility
layouts, blueprints, product and parts drawings, specifications, schematics,
invoices, checks and other business records, presentation graphics, photos,
audio and video clips and facsimile documents. A substantial portion of
corporate data is unstructured. Unstructured data is commonly contained in large
object files which are often referred to as a "binary large object," which files
can create network efficiency problems for organizations that collaborate
electronically either on local area networks ("LANs") or wide area networks
("WANs"). Network traffic and bandwidth limitations have historically been, and
continue to be, one of the major constraints on the deployment of
enterprise-wide document management solutions. Without the resolution of
bandwidth limitations, enterprise-wide document management systems often provide
poor response time to users or limit the maximum number of simultaneous users
supported by a network system. Awaiting the availability of bigger bandwidth is
not a solution, as the demand for bandwidth continues to increase as users begin
to utilize increasingly complex data types such as pictures, audio and video
clips.
Whatever the format and wherever the location, unstructured data
represents information which is essential to a company's business and which
forms a key part of a company's intellectual capital. In today's competitive
marketplace, companies need the ability to leverage their intellectual capital;
however, limitations on a company's ability to access, process and communicate
this information has restrained the productivity of businesses at both the
individual and team levels. Without an effective means of obtaining business
information, workers are often forced to re-create documents from scratch,
duplicating effort and increasing the margin for error. In addition,
professionals often spend a significant amount of their time locating documents
rather than engaging in higher-value activities. Additional complexity results
where documents must be accessed and revised by teams of workers dispersed
throughout an enterprise who may operate different desktop software and
computers. The lack of effective tools for communicating and sharing information
and for automating the business logic makes this process even more
time-consuming, inefficient and error-prone.
Electronic document management systems were developed to enable
customers to effectively and efficiently manage, share and distribute critical
business information. The Gartner Group, an information technologies consulting
group, has estimated that in 1998 revenues generated from software sales in the
global integrated document management market totaled $660 million.
A true EDMS solution is often viewed by organizations as part of
their information systems' re-engineering, and as a result there are several
significant issues organizations typically consider when evaluating an EDMS
solution. Such issues include scalability of the system, the ability to
integrate with existing structural databases and other applications such as
document workflow and product data management ("PDM"), the price of the system,
the ability to view multiple document formats, the level and cost of integration
services required, the impact of the system on network bandwidth, integration
with existing business processes, the ability to control document security, the
ability to operate on existing computing infrastructure and with existing
applications, the system architecture and the ability to handle large and
complex data types and to customize the product to the client's particular
needs. In addition, organizations also consider user related issues such as the
ability to search, retrieve, view, annotate and edit data in a controlled
manner.
3
<PAGE>
THE ALTRIS SOFTWARE SOLUTION
The Company's suite of three-tier, document management software
products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The Company's suite of products provides several key business benefits,
including those described below:
INTEROPERABILITY/ENTERPRISE SCALABILITY. The Company's suite of
products operates on most common hardware, software, network and database
platforms, including Microsoft Windows 95 and 98, Windows NT and UNIX operating
systems for the database component and Oracle and Microsoft database platforms.
In addition, the Company's products are designed for enterprise-wide scalability
so that organizations can deploy solutions that not only meet the needs of
departments but also scale to an entire enterprise with multiple divisions and
thousands of users worldwide.
EXTENSIVE FUNCTIONALITY. The document management and library
functions of the Company's products allow businesses to store, organize and
manage both simple and complex documents within their organizations. Users can
find and access information through full or partial field searches or full text
searches by keyword or by a combination of words. The Company's products provide
extensive computerized controls designed to permit only authorized users to
access information. In addition to the document management and library
functions, the Company's products also include powerful tools enabling users to
make comments, annotations and redline overlays on documents on-line without
changing the underlying information, thus replacing traditional markups on paper
documents and streamlining the review process. The Company's products integrate
with existing e-mail systems and run in conjunction with popular Internet Web
Browsers such as Microsoft Internet Explorer.
ABILITY TO BE TAILORED. The Company's embedded application
programming interfaces ("APIs") simplify tailoring by both users and application
developers, thereby enabling customers to effectively customize and integrate
applications with existing information infrastructure. The Company's Toolkits
include APIs for document viewing, scanning, markup, editing, and printing, plus
manipulating data in document databases.
FASTER, MORE COST-EFFECTIVE IMPLEMENTATION. The Company provides a
complete EDMS solution which includes its own multi-format document manager that
allows users to view, annotate and edit a variety of different types of
documents, while also providing a look and feel consistent with the Company's
products. As a result, the Company believes that the overall cost of
implementing its EDMS solution is significantly lower than competitive systems
in the marketplace, which typically require the customized integration of
viewing, annotation and editing products from disparate software producers.
IMPROVE NETWORK EFFICIENCY. The Company's TIE-Technology
substantially reduces network traffic, decreases the time it takes to access and
view documents and increases the maximum number of simultaneous users supported
by a network system, technology which the Company believes provides it with a
significant competitive advantage.
DOCUMENT-ENABLE EXISTING APPLICATIONS. The Company's
"document-enabling" software allows users to integrate the power of electronic
document management directly into a user's business applications, providing
users with greater access to information from which to make business decisions
and extending the life of these business applications. The Company's
document-enabling software has been integrated with a number of leading PDM,
manufacturing and accounting software systems.
STRATEGY
The Company's strategy includes the following key elements:
EXTEND TECHNOLOGY LEADERSHIP. The Company continually seeks to
extend its position as a technology leader in developing and marketing document
management solutions. The Company intends to do this by (i) continuing to
enhance the features and functionality of its current products, including by
adding and enhancing tools that allow users to customize the graphical user
interfaces ("GUIs"), layout and menu
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items to fit their own needs; (ii) designing additional APIs to simplify
tailoring by both users and application developers; and (iii) providing users
with administrative tools that enable systems operators to monitor individual
use, network traffic and printing volume.
In March 1999, the Company released its Altris EB-TM- product which
is built on a three-tier architecture, allowing users to choose between "thin"
and "thick" client models on the desktop (including Internet/intranet) and to
deploy process and data servers more efficiently. (A "thin" client, model uses a
client/server architecture with most of the applications stored on the server
rather than on the client, while a "thick" client model stores most of the
applications on the client rather than the server.) Altris EB is designed to
provide a wide range of tools for information exchange and review, system
administration, configuration and tailoring plus desktop tools for easy
modification of the look-and-feel and extension of functionality. Altris EB will
support common enterprise tools such as Microsoft Office-TM-, BackOffice-TM- and
MS-Exchange-TM-.
FOCUS DIRECT SELLING EFFORTS ON SELECT VERTICAL MARKETS. The
Company focuses its direct sales force on select vertical markets with
compelling business needs for the Company's document management solutions.
The Company has established a strong market presence in the utility,
manufacturing, transportation and petrochemical and other processing
industries both domestically and internationally. The Company intends to
continue its direct sales and marketing force to increase its market
penetration in these industries as well as in certain other select vertical
markets, including telecommunication providers, defense and other
governmental agencies, electrical and electronic equipment manufacturers,
engineering and construction firms, financial institutions, property
management companies and architecture firms.
EXPAND INDIRECT DISTRIBUTION CHANNELS. The Company intends to
continue to build and develop its existing VAR, systems integrator and OEM
channels which are targeted primarily at industries not covered by its direct
sales force in order to reach the broadest customer base. The Company is
expanding its VAR and systems integrator channel by increasing training and
support programs, developing additional software tools to facilitate
configuration and recruiting additional VARs and systems integrators in key
geographical and vertical markets.
PROVIDE COMPLETE SOLUTIONS. The Company intends to continue to
provide (i) complete EDMS solutions which include the Company's multi-format
document manager; (ii) an extensive range of product tools and features that are
interoperable and scalable across an enterprise and that can be rapidly deployed
at relatively low cost; and (iii) greater network efficiencies than competitive
products. The Company has a comprehensive service and support organization that
is designed to ensure both international and domestic customers' successful
implementation and use of its suite of products. The Company believes its
customers' success in implementing and using the Company's products is critical
to sustaining references and repeat sales from its customer base.
CUSTOMERS
The following are examples of customers who are using the Company's
products:
UTILITIES. Within the utilities industry, countless documents
relating to plant management, facility maintenance and support, transmittal
processing and tracking, matrix security and statutory compliance must be
current and readily available at all times. Furthermore, with pending
deregulation, utilities are under increasing pressure to minimize their costs.
The Company has installed document management solutions at more than 25
utilities around the world. In one example, a commercial utility was relying on
more than 2,000,000 microfilm documents, 750,000 paper documents and 110,000
aperture cards (a form of microfilm technology) for its daily operations.
Beginning in the engineering department, the Company added a document management
solution containing its TIE-Technology which transformed the paper system into
an integrated part of the utility's existing applications, including its work
flow applications. The utility purchased a license for an enterprise-wide
deployment covering 2,000 individual users. The Company's solution enables all
current and historic plant records, including those generated by word processors
and spreadsheet programs, to be readily available throughout the utility.
TRANSPORTATION. In the rail transportation segment, countless
documents relating to scheduling, structures, track and signaling must be
current and readily available at all times. For example, one of the
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world's oldest and largest public transportation systems had more than
3,000,000 maintenance and safety documents stored on aperture cards and
microfiche, and manual handling processes were straining efficient operation.
The Company's document management solution and TIE-Technology now enables
users quick access to all documents on-line, including the documents
described above as well as accounts payable and invoice records, internal
letters and memoranda and other business records, with additional search,
optical character recognition ("OCR") and E-mail functionality. Today, the
system can be accessed and operated by over 1,500 individual users who can
retrieve critical business information whenever necessary on a
near-instantaneous basis, thereby enabling this public transportation system
to better ensure regulatory compliance.
MANUFACTURING. One of the world's largest manufacturers of
earth-moving and construction equipment has a vast network of independent
dealers in over 128 countries. With product information contained in more than
4,200,000 engineering drawings, CAD files, manufacturing documents and aperture
cards, dealers providing customer service in these countries were often forced
to wait for the results of lengthy searches and incurred costly delivery
charges. The Company supplied this manufacturer with a document management
solution for storing and retrieving the millions of pages of product
information. Today, over 15,000 users perform more than 20,000 views and prints
per day at locations around the world with information requests filled in
seconds rather than days.
PETROCHEMICAL. In the highly regulated petrochemical industry,
companies must have the ability to quickly access critical information for
safety, maintenance and regulatory compliance purposes. One of the world's
largest petrochemical companies operates oil platforms in the North Sea from its
principal facilities in Scotland and Norway. Large engineering drawings,
detailed schematics, maintenance instructions and other intricate documentation
often had to be delivered by boat or helicopter, creating substantial delays. By
using the Company's TIE-Technology, this customer was able to transmit documents
to its oil platforms directly by satellite. As a result of the success of the
system, the Company was asked to install document management software at three
other sites. The resulting document management solution currently has thousands
of individual users worldwide and manages all forms of documents, including
paper-based documents, business applications and CAD created documents.
SALES AND MARKETING
DIRECT SALES
The Company focuses its direct sales force on select vertical
markets with compelling business needs for the Company's document management
solution. The Company has established a strong market presence in the utility,
manufacturing, transportation and petrochemical and other processing industries
both domestically and internationally. The Company's strategy is to continue its
direct sales and marketing to increase its market penetration in these
industries as well as in certain other select vertical markets, including
telecommunication providers, defense and other governmental agencies, electrical
and electronic equipment manufacturers, engineering and construction firms,
financial institutions, property management companies and architecture firms.
As of March 23, 1999, the Company's sales and marketing organization
consisted of 18 employees primarily based in Company sales offices located in
the U.S. and in London, England. The Company's field sales force regularly
conducts presentations and demonstrations of the Company's suite of products to
management and users at customer sites as part of the direct sales effort. Sales
cycles for the Company's products generally last from six to twelve months.
INDIRECT DISTRIBUTION CHANNELS
Although the Company has historically generated the majority of its
revenues from its direct sales force, the Company has also established a network
of third-party VARs, system integrators and OEMs who build and sell systems
(with components or complete systems provided by the Company) that address
specific customer needs within various vertical markets, including those
targeted directly by the Company. Sales through indirect channels accounted for
12%, 18% and 19% of the Company's total revenue for the years ended December 31,
1998, 1997 and 1996, respectively.
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The Company's strategy is to continue to build and develop its
existing VAR, systems integrator and OEM channels which are primarily targeted
at the industries and geographic regions not covered by its direct sales force
in order to reach the broadest customer base. The VARs and systems integrators
are an integral part of the Company's distribution strategy as they are
responsible for identifying potential end-users, selling the Company's products
to end-users as part of a complete hardware and software solution, customizing
and integrating the Company's products at the end-user's site and supporting the
end-user following the sale. Additionally, the Company intends to focus
increased effort on growing its VAR and systems integrator channel through
increasing training and support programs, developing additional software tools
to facilitate configuration and recruiting additional VARs and systems
integrators in key geographical and vertical markets.
Set forth below are several of the VARs, systems integrators and
OEMs with whom the Company has entered into cooperative sales arrangements:
<TABLE>
<S> <C>
Adepso Koren Projects Management
Alpha Numeric Solutions Manage IT bpr Norge
CACI Information Systems Modul 1 Data
CAD Capture Prisma Imaging
Data General QSP Financial Information Systems
Datel Group SAIC
Deverill Plc SMARTtech
Excitech Computers Spescom
Fullmark Micro Staffware
GE Capital Consulting Systems Team
</TABLE>
There can be no assurance that any customer, VAR, systems integrator
or OEM will continue to purchase the Company's products. The failure by the
Company to maintain its existing relationships, or to establish new
relationships in the future, could have a material adverse effect on the
Company's business, results of operations and financial condition.
MARKETING COMMUNICATIONS
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, channel marketing,
promotions, seminars, trade shows, web site, telemarketing and ongoing customer
and third-party communications programs. The Company also seeks to stimulate
interest in its products through public relations, speaking engagements, white
papers, technical notes and programs targeted at educating consultants about the
capabilities of the Company and its products.
SERVICES AND SUPPORT
The Company believes that a high level of services and support are
critical to its performance. As a result, the Company maintains a telephone
hotline to provide technical assistance and software support directly to its
end-users on an as-needed basis. The Company also provides technical support,
maintenance, training and consulting to its VARs, systems integrators and OEMs,
which in turn provide technical support services directly to end-users. These
services are designed to increase end-user satisfaction, provide feedback to the
Company as to end-users' demands and requirements and generate recurring
revenue. The Company plans to continue to expand its support programs as the
depth and breadth of the products offered by the Company increase.
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VAR, SYSTEMS INTEGRATORS AND OEM SUPPORT
The Company employs pre-sales, technical support personnel that work
directly with VARs, systems integrators and OEMs to provide responses to
technical sales inquiries. The Company also offers educational and training
programs, as well as customized consulting services to its VARs, systems
integrators and OEMs. Fees for training and consulting services are generally
charged on a per diem basis. The Company also provides product information
bulletins on an ongoing basis, including bulletins posted through its Internet
web site and through periodic informational updates about the products
installed. These bulletins generally answer commonly asked questions and provide
information about new product features.
TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company, in conjunction with its VARs and systems integrators,
offers end-users a software maintenance program that includes software updates
provided by the Company to end-users and technical support provided by the VARs
and systems integrators. Telephone consultation is provided by the Company to
VARs and systems integrators to respond to end-user questions that VARs and
systems integrators are unable to answer. VARs and systems integrators typically
charge end-users a fee for maintenance and support of the entire EDMS and
imaging system, including software and hardware. In turn, the Company charges
VARs and systems integrators an annual fee based upon a percentage of the
then-current list prices of the licensed software.
WARRANTY
The Company generally includes a 90-day limited warranty with
software licenses. During the warranty period, end-users are entitled to
corrections for documented program errors. The services provided during the
warranty period may be extended by the end-user entering into the Company's
software maintenance program.
PRODUCTS
The Company's suite of multi-tier, document management software
products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The underlying architecture for the Company's EDMS employs a model
designed to ensure scalability, modularity and high performance. The Company's
suite of products are grouped into three main categories, which are Core
Document Services, Client Interfaces and Toolkits.
CORE DOCUMENT SERVICES
The Company's EDMS Server, which is the central component of the
document management system, provides document capture, storage, distribution,
version control, check-in/check-out, process and transaction management. The
EDMS Server manages documents of all types, including CAD, image, multi-media
and text, as well as compound or virtual documents consisting of multiple
document types and documents that are edited in one format and distributed in
another (for example, editing a CAD application and distributing in an image
format, or editing in Microsoft Office(TM) and distributing in a printed
document format). Some examples of core document services include:
- CAPTURE: Documents are loaded individually or in batches and
moved through a process which includes quality control,
indexing and storage. Multiple indexing options are provided,
including indexing by structured fields, keywords or full
text. For documents residing in hardcopy format, an
intermediate recognition step is performed by optical
character recognition ("OCR") to create searchable ASCII text.
In addition, integrated COLD technology provides the ability
to capture structured data and retain and present it in report
format, allowing searches against the reports.
- LIBRARY SERVICES: The EDMS Server provides comprehensive
library functions, including storage, management,
distribution, routing, check-in/check-out, version control and
change management. Documents of all formats are managed in a
secure environment which can provide distribution to
authorized users at remote sites. The EDMS Server permits
storage to a wide variety of media,
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including CD-ROM, magnetic disk, optical disks and a
redundant array of inexpensive disks ("RAID") and
uses caching and other functions to enhance performance.
The EDMS Server enables the secure check-in/check-out
of documents for editing, routing for comment or approval
and management of the revision history.
- IMAGE MANAGEMENT: Image is an important data type in any
EDMS solution. The EDMS Server architecture is designed for
both simple and complex image management. The Company's
multi-format document manager allows users to view, annotate
and edit a variety of different types of documents, while
also providing a look and feel consistent with the Company's
products. In addition, to address network traffic
limitations, the Company's TIE-Technology allows monochrome
images (in industry and international standard formats) to
be displayed with only about 5-10% of the network traffic of
many competing products. This performance is achieved across
most popular network types.
DISTRIBUTION: Documents can be distributed in hard copy through a
printer, plotter or fax machine. The output can be tagged with information such
as the date and time, the identity of the requestor and a standard warning
label. The output is automatically rotated and scaled for optimum fit to paper.
Documents can also be distributed on-line over LANs, WANs and the Internet,
thereby facilitating annotating, redlining and editing. Additionally, documents
can be distributed through a wide variety of other media, including CD-ROM,
magnetic disk, optical disks and RAID. To address network traffic limitations,
the Company has developed its TIE-Technology which displays documents at
significantly faster rates than competing products.
CLIENT INTERFACES
The Company offers a variety of system GUIs to allow users to obtain
the most desirable combination of functionality and style. Key system interfaces
include:
- ALTRIS EB-TM- The Company's Altris EB product is designed for
office and technical and engineering environments and provides
a graphical interface to the EDMS Server, enabling users to
search for, display and route documents. In addition, as
optional added features, Altris EB can enable users to add
documents and access such functions as graphical work-flow and
full text search.
- INTERNET/INTRANET. In many companies, the Internet and
Intranet are becoming extremely popular as an interface for
the general user population. The Company's products integrate
with existing e-mail systems and also run in conjunction with
popular internet web browsers such as Microsoft Internet
Explorer-TM-, allowing users to search and display documents
through the Internet and Intranet with minimal client-side
software.
- DOCUMENT-ENABLED APPLICATIONS. The Company's
"document-enabling" software allows users to integrate the
power of electronic document management imaging directly into
a user's business applications, providing users with greater
access to information from which to make business decisions
and extending the life of these business applications. The
Company's document enabling software has been integrated with
a number of leading PDM, workflow and accounting software
systems.
- MULTI-FORMAT DOCUMENT MANAGER. The Company's multi-format
document manager allows users to view, annotate and edit a
variety of different types of documents, while also providing
a look and feel consistent with the Company's products. More
than 100 document formats are supported. By employing
TIE-Technology, the Company believes its products deliver
superior display performance without significant impact on the
network.
- CAD CONNECT The Company's CAD Connect manages the creation of
complex engineering drawings using popular CAD software such
as AutoCAD. CAD Connect provides the CAD engineer with rapid
access to the correct version of drawings and all of the
reference drawings that are used to build compound documents.
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The Company continues to sell its prior document management
products, Target and Pro EDM for the office and technical engineering markets,
respectively; however, such sales are primarily for customers' expansion of
existing systems.
TOOLKIT
The Company's customers generally have unique needs for their
document management systems and associated user interfaces. To address these
needs, the Company provides embedded APIs within EB Business Objects to simplify
tailoring by both users and application developers, thereby enabling customers
to effectively customize and integrate applications with existing information
infrastructure. The Company's toolkits include APIs for document viewing,
scanning, markup, raster editing and printing, as well as APIs for manipulating
data in document databases. The Company also offers toolkits that provide
customers with the ability to document-enable applications built with C/C++,
Powerbuilder and Visual BASIC, as well as existing, legacy UNIX, mini or
mainframe applications.
The Company's desktop products run on Microsoft Windows 95-TM-,
98-TM- and Windows NT-TM- operating systems, and its EDMS Application Server
runs on Windows NT and supports databases and file servers on a range of server
hardware including a variety of UNIX platforms such as Hewlett-Packard, IBM and
Sun, as well as Microsoft Windows NT. The system operates in conjunction with
industry-standard RDBMS including Oracle and Microsoft Sequel Server. The system
also embeds leading full-text search technologies from Fulcrum, and connects to
leading e-mail packages such as Microsoft Exchange and Lotus Notes.
Pricing for the Company's systems can vary substantially based upon
the particular features of the system and peripheral-device content (e.g.,
scanners, printers, workstations, etc.). While pilot systems begin at a price of
approximately $15,000 for a small office system, the price of full scale
enterprise systems can range up to several million dollars. In the past, most
systems ordered from the Company have ranged from $150,000 to $1,500,000. Once
an electronic document management system is installed, the Company generally
receives ongoing revenues from follow-on contracts as a result of enhancements,
expansion and maintenance. Enhancements can modify a system in order to, among
other things, accommodate more documents or users, interface with different
peripheral devices, update the system with recently developed improvements
(including improvements which increase the speed of the system) or implement
other changes in response to changes in the customer's general data processing
environment. Variations in both the size and timing of orders can result in
significant fluctuations in the Company's revenues on a quarterly basis.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on providing
customers with the most technologically advanced solutions for their document
management needs. The Company believes that the marketplace is rapidly moving
toward demanding that all corporate information, both structured and
unstructured, simple and complex, be managed as a consistent and interconnected
global enterprise network. This trend demands that products and services work
across technology platforms, business processes and geographic locations to
establish real-time document management systems with imaging capabilities. The
need to manage global enterprise networks encompasses many different forms of
information, including small and large documents and other complex information
objects (x-rays, photos, color JPEG files, etc.). The Company has responded to
this market evolution by developing new approaches to deal with the problem of
accessing very large documents or information objects over WANs and LANs and
intends to continue to devote research and development activity to this area.
The Company intends to continue to extend its position as a
technology leader in developing and marketing document management solutions
that include imaging capability. The Company intends to do this by continuing
to enhance the features and functionality of its current products, including
tools to allow users to customize the GUIs, layout and menu items of the EDMS
to fit their own needs, designing additional APIs to simplify tailoring by
both users and application developers and administrative tools to enable
systems operators to monitor individual use, network traffic and printing
volume. The Company also intends to continue to enhance the performance of
its current products, including advancing its TIE-Technology to work with
larger and more complex documents, adopting parallel three-tier architecture
and also developing tools to reduce telecommunication expenses for the
distribution and replication of data over
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geographically dispersed systems. Through leveraging its technology, the Company
also plans to introduce new products and product extensions which are
complementary to its existing suite of products and which address both existing
and emerging market needs, including expanding the applications for its
document-enabling capabilities and its TIE-Technology.
In 1998, 1997 and 1996, the Company's research and product
development expenses were approximately $2,314,000, $4,155,000 and $3,363,000,
respectively. Development is also conducted within the scope of a customer
contract if a customer requires additional functionality not provided by the
Company's present systems. Technical expenses which include project management,
installation, project design specification and other project related expenses,
included in cost of revenues were $2,328,000, $2,786,000 and $2,607,000 for
1998, 1997 and 1996, respectively.
In 1998 the Company continued its work to reengineer the initial
release of Altris EB. Version 11 of EB is the result of that reengineering and
was launched at the Altris Accent International User Group in January and began
shipping in early March 1999. The Company intends to focus its development
effort on enhancing Altris EB with new features such as extended web
functionality. The Company also intends to add records management capabilities
to Altris EB to provide archive and retention policies for customers such as
nuclear power plants and other regulated industries. The Company plans to
develop specific applications for the vertical markets on which the Company has
focused. The Company believes that the modular and open nature of Altris EB
provides an excellent platform for these market applications. Altris is a member
of the Microsoft Developer Network (MSDN) which allows the Company to properly
plan for support for Microsoft Windows 2000-TM- and Office 2000-TM-.
The Company offers Altris EB as an upgrade for customers under
maintenance contracts. The Company charges separately for any installation or
integration costs. See "Item 1. Business--Strategy" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Operating Expenses."
There can be no assurance that the Altris EB product will receive
market acceptance. The Company's product development efforts with respect to
Altris EB are expected to continue to require substantial investments by the
Company, and there can be no assurance that the Company will have sufficient
resources to make the necessary investments. The Company has experienced product
development delays in the past, and may experience delays in the future. Lack of
market acceptance of the Company's Altris EB product, or failure to accurately
anticipate customer demand and meet customer performance requirements could have
a material adverse effect on the Company's results of operations and financial
condition.
COMPETITION
The market for the Company's products is intensely competitive,
subject to rapid change and significantly affected by new product introduction
and other market activities of industry participants. The Company currently
encounters direct competition from a number of public and private companies such
as Documentum, Inc., FileNet Corporation, OpenText and PC DOCS. Many of these
direct competitors have significantly greater financial, technical, marketing
and other resources than the Company. The Company also expects that direct
competition will increase as a result of recent consolidation in the software
industry.
The Company also faces indirect competition from systems integrators
and VARs. The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as for recommendation of its products to potential purchasers. Although the
Company seeks to maintain close relationships with these service providers, many
of these third parties have similar, and often more established, relationships
with the Company's principal competitors. If the Company is unable to develop
and retain effective, long-term relationships with these third parties, the
Company's competitive position would be materially and adversely affected.
Further, there can be no assurance that these third parties will not market
software products in competition with the Company in the future or will not
otherwise reduce or discontinue their relationship with, or support of, the
Company and its products. In addition, RDBMS vendors, such as Oracle and Sybase,
and other software developers such as Microsoft, may compete with the Company in
the future. Like the Company's current competitors, many of
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these companies have longer operating histories, significantly greater
resources and name recognition and a larger installed base of customers than
the Company.
The Company believes that the principal competitive factors
affecting its market include system features such as scalability of the system,
the ability to integrate with existing structural databases and other
applications such as document workflow and PDM, the ability to provide image
management capability, the price of the system, the level and cost of
integration required, the impact of the system on network bandwidth, integration
with existing business processes, the ability to operate on existing computing
infrastructure and with existing applications, the system architecture and the
ability to handle large and complex data types and to customize products to the
client's needs. In addition, organizations also consider features such as the
ability to search, retrieve, view, annotate and edit data in a controlled
manner. Although the Company believes that it currently competes favorably with
respect to the factors referenced above, there can be no assurance that the
Company can maintain its competitive position against current and any potential
competitors, especially those with greater financial, marketing, service,
support, technical and other resources than the Company. In addition, the
Company's significant losses and customer uncertainty regarding the Company's
financial condition are likely to have a material adverse effect on the
Company's ability to sell its products in the future against competition.
PRODUCT BACKLOG AND CURRENT CONTRACTS
The Company's contract backlog consists of the aggregate anticipated
revenues remaining to be earned at a given time from the uncompleted portions of
its existing contracts. It does not include revenues that may be earned if
customers exercise options to make additional purchases. At December 31, 1998,
the Company's contract backlog was $7,491,000, as compared to $9,610,000 at
December 31, 1997. The Company expects $5,303,000 of the December 31, 1998
backlog to be completed in 1999, as compared to $8,210,000, of the December 31,
1997 backlog which the Company then expected to complete in 1998. The amount of
contract backlog is not necessarily indicative of future contract revenues
because short-term contracts, modifications to or terminations of present
contracts and production delays can provide additional revenues or reduce
anticipated revenues. The Company's backlog is typically subject to large
variations from time to time when new contracts are awarded. Consequently, it is
difficult to make meaningful comparisons of backlog.
The Company's contracts with its customers generally contain
provisions permitting termination at any time at the convenience of the customer
(or the U.S. Government if the Company is awarded a subcontract under a prime
contract with the U.S. Government), upon payment of costs incurred plus a
reasonable profit on the goods and services provided prior to termination. To
the extent the Company deals directly or through prime contractors with the U.S.
Government or other governmental sources, it is subject to the business risk of
changes in governmental appropriations. In order to reduce the risks inherent in
competing for business with the U.S. Government, the Company has directed its
government contracts marketing efforts toward teaming with large corporations,
who typically have existing government contracts, can alleviate the cash flow
burdens often imposed by government contracts and have more extensive experience
in and resources for administering government contracts. The Company does not
have any contractual arrangements regarding such joint marketing efforts. In the
past, such efforts have been pursued when deemed appropriate by the Company and
such corporations in response to opportunities for jointly providing systems or
services to potential government agency customers.
PATENTS AND TECHNOLOGY
The Company's success is dependent in part upon proprietary
technology. The Company owns certain U.S. and foreign patents covering certain
aspects of its document management systems technology including two patents
concerning the technology used to present the raster data to the view, markup or
edit user very quickly which involve data storage/transmission and scaling
algorithms which utilize industry standards. The Company also owns a patent on
technology to allow edit users to make changes to documents without having to
specify whether they are working on raster or vector data and a patent for a
revisory capability that allows users to modify and store drawing changes in
raster and vector format for subsequent review of the original document and each
sequential revision. There can be no assurance that the Company's patents will
be found valid if challenged or, if valid, will provide meaningful protection
against
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competition. While the Company believes that the protection afforded by its
patents will have value, the rapidly changing technology in the industry
makes the Company's success largely dependent on the technical competence and
creative skills of its personnel.
The Company also relies on a combination of trade secret, copyright
and non-disclosure agreements to protect its proprietary rights in its software
and technology. There can be no assurance that such measures are or will be
adequate to protect the Company's proprietary technology. Furthermore, there can
be no assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
The Company's software is licensed to customers under license
agreements containing provisions prohibiting the unauthorized use, copying and
transfer of the licensed program. Policing unauthorized use of the Company's
products is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, any significant piracy of its
products could materially and adversely affect the Company's financial condition
and result of operations. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States and there can be no assurance that the Company's means of
protecting its proprietary rights will be adequate.
In addition, the Company also relies on certain software that it
licenses from third parties, including software that is integrated with
internally developed software and used in the Company's products to perform key
functions. There can be no assurances that the developers of such software will
remain in business, that they will continue to support their products or that
their products will otherwise continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain any of these
software licenses could result in delays or reductions in product shipments
until equivalent software can be developed, identified, licensed and integrated,
which could adversely affect the Company's business, operating results and
financial condition.
The Company is not aware that any of its software products infringe
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim infringement by the Company with respect to
its current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims. Any such claims,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
EMPLOYEES
As of March 23, 1999, the Company had 85 full-time employees, of
whom 46 were engaged in product development and application engineering
activities, 12 in customer support and implementation, 18 in sales and marketing
and 9 in administration. The Company also utilizes consultants for specific
projects. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes its relationship with its
employees is good. Competition for qualified personnel in the industry in which
the Company competes is intense and the Company expects that such competition
will continue for the foreseeable future. The Company has an incentive stock
option plan for granting options to employees as a means of attracting and
keeping key individuals. The Company believes that its future success will
depend, in large measure, on its ability to continue to attract, hire and retain
qualified employees and consultants.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in San Diego, California. The
Company leases 31,016 square feet of a 40,000 square foot building in San Diego.
The term of the lease is through March 2001, at a monthly rent of $17,059, with
annual increases of approximately 4%.
In October 1996, the Company closed its engineering and sales office
in Camarillo, California, approximately 50 miles northwest of Los Angeles. The
facility is currently subleased. The lease covers 19,400 square feet of a 40,000
square foot building. The term of the lease is through April 2001. The monthly
rent is $12,349, subject to annual adjustments not to exceed 4% in any year.
The Company's United Kingdom subsidiary leases a facility which
occupies 18,000 square feet in Ealing, London. The term of the lease is through
March 2001. The monthly rent is $20,006.
The Company also leases a facility in Florida under a lease which
expires in 2002. The monthly rent is $5,444. The facility is currently subleased
at the same rent.
See Note 11 of the Notes to the Consolidated Financial Statements
for further information regarding the Company's lease commitments.
ITEM 3. LEGAL PROCEEDINGS
Between March 16, 1998 and May 1, 1998, six complaints alleging
violations of the federal securities laws were filed against the Company and
certain of its present and former officers and directors in the United States
District Court for the Southern District of California. The complaints are
purported class actions filed by individuals who allege that they purchased the
Company's stock during the purported class periods. On September 11, 1998, the
court entered an order consolidating these cases, appointing lead plaintiffs and
approving plaintiffs' selection of lead counsel. On October 29, 1998, the lead
plaintiffs filed a Consolidated Amended Class Action Complaint For Violation of
The Federal Securities Laws And The California Corporations Code.
The consolidated amended complaint asserts claims for violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder and sections 25400 and 25500 of the California
Corporations Code against the Company, Jay V. Tanna, John W. Low and Price
Waterhouse LLP on behalf of persons who purchased the Company's stock between
April 17, 1996 and March 11, 1998. The complaint seeks certification as a class
action, compensatory damages in an unspecified amount, prejudgment and
postjudgment interest, attorneys fees, expert witness fees and other costs, and
unspecified extraordinary equitable and/or injunctive relief.
On March 3, 1999, the Company entered into a Memorandum of
Understanding providing for the settlement of these class actions. 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.
On April 1, 1998, Altris' former Chairman of the Board, President
and Chief Executive Officer, Jay V. Tanna and Altris entered into a Separation
Agreement and Release of Claims providing Mr. Tanna with $215,000 of
compensation to be paid over the course of one year. As part of the settlement
of these class actions, Mr. Tanna has agreed to forego any claim for the unpaid
compensation of $131,000 relating to the Separation Agreement and Release of
Claims and to surrender his 35,000 shares of common stock. Mr. Tanna and Altris
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
14
<PAGE>
Altris' bylaws, California law, and the indemnity agreement between Altris
and Mr. Tanna related to his services as a director and officer of Altris.
On July 13, 1998, the Securities and Exchange Commission issued a
formal order of investigation authorizing its staff to examine the financial
statements filed in Altris' Forms 10-Q for the first three quarters of 1996 and
1997, and on the Form 10-K for the year ended December 31, 1996. All of the
financial statements in question have previously been restated. The Company is
cooperating fully in this matter.
In addition to the securities actions described above, the Company
is involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded on the Nasdaq National Market
through March 11, 1998 when trading was suspended by the Nasdaq Stock Market.
The Company was delisted from the Nasdaq National Market as a result of not
meeting certain listing requirements. The Company now trades on the OTC Bulletin
Board under the symbol "ALTS." The following table shows, for the calendar
quarters indicated, the high and low sale prices of the Common Stock:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 High Low
---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . $13.88 $7.26
Second Quarter . . . . . . . . . . . 18.00 8.76
Third Quarter. . . . . . . . . . . . 12.50 7.38
Fourth Quarter . . . . . . . . . . . 10.63 5.75
YEAR ENDED DECEMBER 31, 1997
First Quarter . . . . . . . . . . . $8.25 $4.50
Second Quarter . . . . . . . . . . . 6.75 3.50
Third Quarter. . . . . . . . . . . . 9.75 5.69
Fourth Quarter . . . . . . . . . . . 8.19 2.75
YEAR ENDED DECEMBER 31, 1998
First Quarter . . . . . . . . . . . $3.00 $1.44
Second Quarter . . . . . . . . . . . 1.00 .37
Third Quarter. . . . . . . . . . . . 1.00 .25
Fourth Quarter . . . . . . . . . . . .65 .29
</TABLE>
The stock prices listed above have been restated to reflect the
one-for-two reverse stock split effected by the Company on October 25, 1996.
On March 23, 1999, there were approximately 453 holders of record of
the Company's Common Stock and the last sale price of the Common Stock as
reported on the Nasdaq National Market on March 23, 1999 was $1.00 per share.
The Company has never paid a dividend on its Common Stock, and the
current policy of its Board of Directors is to retain all earnings to provide
funds for the operation and expansion of the Company's business. Consequently,
the Company does not anticipate that it will pay cash dividends on its Common
Stock in the foreseeable future.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% Subordinated Debenture due June 27, 2002
with a principal amount of $3,000,000 (the "Subordinated Debenture"), and
warrants to purchase additional shares of Common Stock. The aggregate gross
proceeds to the Company from the private placement before expenses were
$6,000,000. A summary of certain terms of the private placement is set forth
below.
CONVERTIBLE PREFERRED STOCK. The Series D Preferred Stock bears a
dividend of 11.5% per annum, accruing quarterly, and is convertible into shares
of the Company's common stock at a conversion price of $6.00 per share (subject
to reset on June 27, 1999 to the average closing price of the common stock on
the 20 trading days immediately prior to June 27, 1999 if such average is less
than $6.00 per share). The Company may redeem any or all of the Series D
Preferred Stock at its stated value on or after June 27, 1999 at any time the
20-day average of the closing price of the common stock equals or exceeds $9.50
per share,
16
<PAGE>
and the Company may redeem any or all of the Series D Preferred Stock
on or after June 27, 2002 at its stated value irrespective of the trading price
of its common stock. If an event of default exists under the purchase agreement
governing the issuance of the Series D Preferred Stock (the "Preferred Stock
Purchase Agreement"), then the dividend rate increases to 14% per annum until
such time as the event of default is cured. 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. As the
Company is currently in default under the Preferred Stock Purchase Agreement as
a result of non-payment of dividends due in 1998, the dividend rate on the
Series D Preferred Stock has increased to 14%. 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Factors That May Affect Future
Results."
SUBORDINATED DEBENTURE. The Subordinated Debenture, which was issued
at 100% of par, provides for quarterly interest payments with a maturity date of
June 27, 2002. The Company may prepay the Subordinated Debenture prior to
maturity without penalty. In November 1998, the Company entered into a Security
Agreement with the Investor providing the Investor with a second priority
security interest in substantially all the 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. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Factors That May Affect Future
Results."
WARRANTS AND CONTINGENT WARRANTS. In connection with the issuance of
the Series D Preferred Stock, the Company has agreed to grant to the Investor
warrants to purchase the following number of shares of its common stock if the
Series D Preferred Stock remains outstanding on each of the following dates: (i)
50,000 shares, at an exercise price of $7.00 per share, on June 27, 2000 if the
Series D Preferred Stock has not been redeemed or converted in full on or prior
to June 27, 2000; (ii) 50,000 shares, at an exercise price of $7.00 per share,
on June 27, 2001 if the Series D Preferred Stock has not been redeemed or
converted in full on or prior to June 27, 2001; (iii) 250,000 shares, at an
exercise price equal to the trading price per share at the issuance of the
warrant, on July 17, 2002 if the Series D Preferred Stock has not been redeemed
or converted in full on or prior to July 17, 2002; and (iv) 250,000 shares, at
an exercise price equal to the trading price per share at the issuance of the
warrant, on June 27, 2003 if the Series D Preferred Stock has not been redeemed
or converted in full on or prior to June 27, 2003. In connection with the
issuance of the Subordinated Debenture, the Company granted to the Investor
warrants to purchase 300,000 shares of its common stock at an exercise price of
$6.00 per share. In addition, the Company has agreed to grant to the Investor
additional warrants to purchase 50,000 shares of its common stock at an exercise
price of $7.00 per share on June 27, 2000 if the Subordinated Debenture then
remains outstanding and on each anniversary thereafter on which the Subordinated
Debenture remains outstanding. Each warrant granted to the Investor expires on
the date that is five years from the date of grant of such warrant.
ISSUABLE MAXIMUM; MANDATORY REDEMPTION. 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 issued to the Investor 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 for the Series D Preferred Stock.
REGISTRATION RIGHTS. In connection with the issuance of the Series D
Preferred Stock, the warrants to purchase 300,000 shares of common stock and the
various contingent warrants to purchase shares of common stock, the Company
granted to the Investor certain registration rights for the underlying common
stock. Such registration rights include the right, subject to certain
conditions, to demand at any time and on up to three occasions that the Company
register such underlying shares for resale.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data
of the Company. The financial data for each of the five years in the period
ended December 31, 1998 have been derived from the audited Consolidated
Financial Statements. The results of Trimco are included below since December
27, 1995, the date of the acquisition.
The data set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
Consolidated Statement of Operations Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 12,803 $ 17,773 $ 19,549 $ 12,731 $ 9,547
Cost of revenues 7,027 9,383 9,540 5,791 4,822
-------- -------- -------- -------- --------
Gross profit 5,776 8,390 10,009 6,940 4,725
-------- -------- -------- -------- --------
Operating expenses:
Research and development 2,314 4,155 3,363 1,402 769
Marketing and sales 4,385 8,179 5,581 3,570 2,627
General and administrative 5,083 4,241 3,077 1,581 1,146
Settlement of lawsuits 1,128 -- -- -- --
Write off of capitalized software 625 -- -- -- --
Write down of assets to net
realizable value -- 190 -- 1,664 --
Charge for purchased research and
development -- -- -- 10,595 --
Loss on office closure -- -- 410 -- --
-------- -------- -------- -------- --------
13,535 16,765 12,431 18,812 4,542
-------- -------- -------- -------- --------
(Loss) income from operations (7,759) (8,375) (2,422) (11,872) 183
Interest and other income 31 383 88 137 207
Interest and other expense (664) (447) (114) (95) (115)
-------- -------- -------- -------- --------
Net (loss) income $ (8,392) $ (8,439) $ (2,448) $(11,830) $ 275
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic net (loss) income per common share $ (.92) $ (.90) $ (.26) $ (1.68) $ 0.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted net (loss) income per common share $ (.92) $ (.90) $ (.26) $ (1.68) $ 0.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing basic net (loss)
per common share 9,615 9,585 9,250 7,026 6,992
Shares used in computing diluted net (loss)
income per common share 9,615 9,585 9,250 7,026 7,127
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
Consolidated Balance Sheet Data 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (6,509) $ (1,977) $ 2,064 $ 939 $ 2,799
Total assets 11,366 15,836 18,260 19,002 9,771
Long-term obligations 6,453 2,920 1,966 1,420 --
Mandatorily redeemable convertible
preferred stock 3,003 2,682 -- -- --
Shareholders' (deficit) equity (6,778) 2,048 9,863 8,116 5,658
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
When used in the following discussion, the words "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements,
including the Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of items included in the Company's Consolidated Statement of Operations
for each of the last three fiscal years:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 54.9 52.8 48.8
------- ------- --------
Gross profit 45.1 47.2 51.2
------- ------- --------
Operating expenses:
Research and development 18.1 23.4 17.2
Marketing and sales 34.2 46.0 28.5
General and administrative 39.7 23.9 15.8
Settlement of lawsuits 8.8 - -
Write off of capitalized software 4.9 - -
Write down of assets to net realizable value - 1.0 -
Loss on office closure - - 2.1
------- ------- --------
105.7 94.3 63.6
------- ------- --------
Loss from operations (60.6) (47.1) (12.4)
Interest and other income .2 2.1 .5
Interest and other expense (5.1) (2.5) (.6)
------- ------- --------
Net loss (65.5)% (47.5)% (12.5)%
------- ------- --------
------- ------- --------
</TABLE>
REVENUES
Revenues were $12,803,000, $17,773,000 and $19,549,000 for 1998,
1997 and 1996, respectively. The decrease of $4,970,000 in 1998 compared to 1997
is primarily due to a decline in sales of new large systems. The decrease of
$1,776,000 in 1997 compared to 1996 was the result of a decline in sales of new
large systems, which was partially offset by an increase in revenues from system
enhancements, expansions and maintenance.
19
<PAGE>
New systems revenues in 1998, 1997, and 1996 were $4,044,000 (32%),
$6,839,000 (38%), $10,262,000 (52%), respectively, while revenues from system
enhancements, expansion and maintenance were $8,759,000 (68%), $10,934,000 (62%)
and $9,287,000 (48%), respectively. System enhancements are changes to a system
previously installed by the Company in order to, among other things, accommodate
more documents or users, interface with different peripheral devices, update the
system with recently developed improvements (including improvements which
increase the speed of the system) or implement other changes in response to the
customer's general data processing environment. See "Item 1. Business - Sales
and Marketing".
In 1998 and 1997, revenues from new systems decreased $2,795,000 and
$3,423,000, respectively from the previous year. Management believes that the
Company's inability to provide the Altris EB product as originally planned in
1997, which was to address the needs of new customers for additional features
and functionality, was the principal cause for the decline in new systems
revenue in 1998 and 1997. See "Item 1. Business-Development". In addition, the
decline in new system revenues from 1996 to 1997 was due to a sale of one
substantial system which accounted for 12% of total revenues in 1996, whereas in
1998 and 1997 no sale exceeded 10%. In 1998, revenues from system enhancements,
expansion and maintenance decreased $2,175,000 from 1997. In 1997, revenues
generated from system enhancements, expansion and maintenance increased
$1,647,000 over 1996. Management believes the decrease in 1998 was largely due
to the delay in the introduction of Altris EB and customers' uncertainty
regarding the financial condition of the Company. 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.
A small number of customers has typically accounted for a large
percentage of the Company's annual revenues. One consequence of this has been
that revenues can fluctuate significantly on a quarterly basis. The Company's
reliance on relatively few customers could have a material adverse effect on the
results of its operations on a quarterly basis. Additionally, a significant
portion of the Company's revenues has historically been derived from the sale of
systems to new customers.
COST OF REVENUES
Gross profit as a percentage of revenues was 45%, 47% and 51% for
1998, 1997 and 1996, respectively. The decrease in gross profit margin in 1998
from 1997 was due primarily to a greater proportion of revenues for 1998 related
to the sale of third-party software products which have a significantly lower
gross margin than the Company's proprietary software products. Software license
revenues were $4,189,000, $8,154,000, and $9,554,000 in 1998, 1997 and 1996,
respectively, representing 33%, 46%, and 49% of revenues, respectively. The
decline in software license revenues and related cost of license revenues
generated from software sales in 1998 from 1997 was due to declines in sales
generated from new systems and system expansions. Service revenues, which
include maintenance, training and consulting services, decreased to $7,786,000
in 1998 from $7,969,000 in 1997. Hardware sales, which have a lower margin than
software and services, decreased from $1,837,000 in 1996 to $1,650,000 in 1997
to $828,000 in 1998. The Company's software and services are sold at a
significantly higher margin than third party products, which are resold at a
lower gross profit percentage in order for the Company to remain competitive in
the marketplace. Gross profit percentages can fluctuate quarterly based on the
revenue mix of Company software, services, proprietary hardware and third party
software or hardware.
OPERATING EXPENSES
Research and development expense was $2,314,000, $4,155,000, and
$3,363,000 for 1998, 1997 and 1996, respectively. Research and development
decreased $1,841,000 due in part to a reduction of personnel in 1998 from 1997.
Research and development expense can vary based on the amount of engineering
service contract work required for customers versus purely internal development
projects. It may also vary based on internal development projects in which
technological feasibility and marketability of a product are established. These
costs are capitalized as incurred and then amortized when the product is
available for general release to customers. Technical expenses on
customer-funded projects are included in
20
<PAGE>
cost of revenues, while expenses on internal projects are included in
research and development expense. See "Item 1. Business - Product
Development".
Marketing and sales expense was $4,385,000, $8,179,000, and
$5,581,000 for 1998, 1997 and 1996, respectively. As a result of the delay in
releasing Altris EB, the Company's next generation document management software,
the Company reduced marketing and promotional costs and personnel, resulting in
a reduction of $3,794,000 in marketing and sales expense in 1998 compared to
1997. In 1997 in connection with the initial marketing of the new Altris EB
product suite, and efforts to increase name recognition for the new "Altris"
name which the Company adopted in October of 1996, the Company incurred
substantial marketing and promotional costs. The increase from 1996 to 1997 was
primarily due to these promotions and additional sales and support personnel
hired and related costs associated therewith.
General and administrative expense was $5,083,000, $4,241,000, and
$3,077,000 for 1998, 1997 and 1996, respectively. The increase from 1997 to 1998
was primarily due to increased legal, accounting and consultancy costs
associated with the Company's restatement of its financial statements for fiscal
year 1996 and the three interim quarters in 1997 and the resulting securities
class action lawsuits. In addition, during 1998 the Company incurred $611,000 in
charges resulting primarily from severance costs, including amounts owed under a
Separation Agreement between the Company and its former CEO. In addition, during
the fourth quarter of 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.
Goodwill amortization expense in 1998 increased $450,000 as a result of the
change in the remaining estimated useful life of the goodwill. The increase from
1996 to 1997 was due primarily to expenses associated with an increase in the
allowance for doubtful accounts, a contract dispute and an increase in legal and
professional fees, goodwill amortization, and investor relations expenses. In
addition, during the second quarter of 1997, the Company wrote off certain
offering costs, resulting in a one-time charge to operations in the amount of
$270,000. The costs that were written off were not directly related to the
private placement that occurred during the second quarter of 1997. General and
administrative expense includes amortization of goodwill which increased from
$746,000 in 1996, to $853,000 in 1997 and $1,269,000 in 1998.
On March 3, 1999 ("the settlement date"), the Company entered into a
Memorandum of Understanding providing for the settlement of certain consolidated
securities class action lawsuits pending against the Company. The Company
recorded expense of $1,128,000 in connection with this settlement in 1998 based
on the average closing market price in the week preceding the settlement date
times the number of shares of the Company's common stock to be issued in the
settlement. (See "Item 3. Legal Proceedings" and Note 12 to the Consolidated
Financial Statements.)
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 1998.
In 1997 the Company wrote off $190,000 of certain software
development costs related to products for which costs were deemed to be
unrecoverable due to the future product direction of the Company.
In October 1996, the Company closed its facility in Camarillo,
California which served as a warehouse for hardware inventory and a remote
engineering office. As a result of such closure, the Company incurred a $410,000
loss which was recorded in 1996. The $410,000 loss resulted from subleasing the
facility and additional costs related to the relocation of employees and the
movement of inventory and equipment to the Company's headquarters in San Diego,
California.
INTEREST AND OTHER INCOME
Interest and other income was $31,000 $383,000, and $88,000 for
1998, 1997 and 1996, respectively. The decrease was due to lower cash balances
in 1998 compared to 1997. The increase in 1997 from 1996 was primarily due to
the subletting of a facility for rent equal to the Company's obligation under
non-cancelable terms for which the Company had previously accrued a loss for the
unfavorable lease. In addition, the increase in 1997 from 1996 was due to higher
short-term investment balances.
21
<PAGE>
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $664,000, $447,000 and $114,000
for 1998, 1997 and 1996, respectively. The increase for 1998 compared to 1997
was due to a higher debt balance coupled with a higher rate of interest paid on
the Company's debt in 1998 as compared to 1997. The increase in 1997 from 1996
was also due to these same factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash and cash equivalents
totaled $530,000 as compared to $1,938,000 at December 31, 1997, and its current
ratio was .3 to 1. The Company has two revolving credit facilities which provide
for borrowings of up to $838,000. At December 31, 1998, $838,000 was outstanding
on the revolving loan agreements. In addition, the Company's U.K. subsidiary has
an overdraft credit facility of $415,000 (L250,000). The outstanding balance on
this facility is payable on demand of the lender. At December 31, 1998,
borrowings on this facility were $375,000. The Company has guaranteed the
borrowings on this facility. The Company and the bank agreed to extend the
facility from January 15, 1999 to April 30, 1999 for total borrowings not to
exceed $415,000 (L250,000). Interest shall be payable at 3% per annum over the
bank's base rate. See Note 4 of the Notes to the Consolidated Financial
Statements.
In 1998, cash provided by operating and financing activities totaled
$1,158,000 and $122,000, respectively, while cash used in investing activities
totaled $2,653,000. On September 21, 1998, the Company entered into an agreement
with SDRC to sell its RIPS product, including source code and to license certain
other software including portions of the Company's document management products,
Enabler and EB. The transaction provided cash of $2,375,000 to the Company.
Revenue related to this sale is being recognized over five years. The balance of
revenue not yet recognized is included in deferred revenue, although such
revenue will not result in further cash payment to the Company. Cash provided by
other deferred revenue totaled $1,216,000 in 1998. Deferred revenue varies from
quarter to quarter, and depends on the timing of payments received for the
Company's products and services as compared to the timing of revenue
recognition. The Company also received cash provided by financing activities
through net borrowings of $209,000 under the Company's revolving loan and bank
agreements. In 1997, cash provided by financing activities totaled $4,443,000 of
which $5,306,000 was generated by issuance of the Subordinated Debenture and the
Series D Preferred Stock in a private placement. This amount was partially
offset by repayments net of borrowings on the Company's revolving loan
agreements of $909,000. Cash used in operating and investing activities in 1997
totaled $2,355,000 and $2,372,000, respectively.
As a result of misapplications in its revenue recognition policies,
the Company, in 1998, restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. The restatement triggered events of
default under each of the Company's revolving loan agreements and under the
Subordinated Debenture. The lenders under such agreements and the Subordinated
Debenture agreed to waive such events of default. The Lender has also waived
compliance with certain financial covenants through March 15, 2000. There can be
no assurances that the Company will be able to secure from its lenders a further
waiver of any events of default, including any events of default occurring after
March 15, 2000 under the financial covenants of the revolving loan agreements.
If such events of default are not then waived, the Company may then be required
to repay the full amount of its outstanding indebtedness under the revolving
credit agreements and the Subordinated Debenture. Defaults in the payment of
such indebtedness or in the performance of other covenants under the agreements
related to such indebtedness, whether occurring prior to or after March 15,
2000, could also result in the Company being required to repay the full amount
of such indebtedness. In addition because the overdraft credit facility of the
Company's U.K. subsidiary is payable upon demand, the Company could be required
to at any time to repay all outstanding borrowings under such facility. The
repayment of such indebtedness would require additional debt or equity
financing. There can be no assurances that any such financing would be
available.
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,
22
<PAGE>
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 other means 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.
NET OPERATING LOSS TAX CARRYFORWARDS
As of December 31, 1998, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $42,000,000
and $9,429,000, respectively which expires 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,
the Company may be required to pay more Federal income taxes or to pay such
taxes sooner than if the use of its NOL and credit carryforwards were not
restricted.
Over the past five years, the Company has issued equity securities
in connection with the private placement in June 1997, the Trimco acquisition in
December 1995, the Optigraphics acquisition in September 1993 and through
traditional stock option grants to employees. Although there was no "ownership
change" in 1997, this activity increases the potential for an "ownership change"
for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired
$926,000 in deferred tax assets of which approximately $626,000 was provided as
a valuation allowance. In June 1997, the $300,000 tax asset was realized. In the
event that 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.
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.
23
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
UNCERTAIN IMPACT OF RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the misapplications in its revenue recognition
policies, the Company in 1998 restated its previously presented interim
financial information and annual financial statements for 1996 and the interim
information for the first three quarters of 1997. In connection with the
misapplications, conditions which collectively represented material weaknesses
in the Company's internal accounting controls were identified. These conditions
included a lack of (i) sufficient oversight by the Company in regard to revenue
recognition practices of the Company's U.K. subsidiary, (ii) adherence to
existing internal controls and (iii) an adequate internal control structure in
the Company's U.K. subsidiary.
To address the material weaknesses represented by these conditions,
the Company adopted a plan to strengthen the Company's internal accounting
controls. This plan included updating the Company's revenue recognition policies
regarding accounting and reporting for its customer contracts and contracts with
Value Added Resellers (VARs). The Company has implemented these policies.
The report of the Company's independent accountants, Grant Thornton
LLP, on the Company's Consolidated Financial Statements as of and for the year
ended December 31, 1998 includes an explanatory paragraph regarding the
Company's ability to continue as a going concern. See "Report of Independent
Certified Public Accountants" accompanying the Consolidated Financial
Statements. The Company's restatement of its financial statements, de-listing of
the Company's Common Stock from the Nasdaq National Market as a result of the
Company's failure to meet certain listing requirements, corporate actions to
restructure operations and reduce operating expenses, and customer uncertainty
regarding the Company's financial condition has had, and are likely to have in
the future, a material adverse effect on the Company and its ability to sell its
products in future.
FOREIGN CURRENCY
The Company's geographic markets are primarily in the United States
and Europe, with sales in other parts of the world. In fiscal 1998, revenue from
the United States, Europe and other locations in the world were 63%, 33% and 4%,
respectively. This compares to 56%, 37% and 7%, respectively, in fiscal 1997 and
65%, 28% and 7%, respectively in fiscal 1996. The European currencies have been
relatively stable against the U.S. dollar for the past several years. As a
result, foreign currency fluctuations have not had a significant impact on the
Company's revenues or results of operations. The Company has recently increased
its sales efforts in international markets outside Europe, including Asia and
Latin America, whose currencies have tended to fluctuate more relative to the
U.S. dollar. In addition, the current continued weakness in Asian currencies may
result in reduced revenues from the countries affected by this condition.
Changes in foreign currency rates, the condition of local economies, and the
general volatility of software markets may result in a higher or lower
proportion of foreign revenues in the future. Although the Company's operating
and pricing strategies take into account changes in exchange rates over time,
there can be no assurance that future fluctuations in the value of foreign
currencies will not have a material adverse effect on the Company's business,
operating results and financial condition.
INFLATION
The Company believes that inflation has not had a material effect on
its operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
24
<PAGE>
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' computer systems and/or
software may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has commenced a program, to be substantially completed
by the Fall of 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. Implementation of software
products from third parties, however, will require the dedication of
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999 as a part of
the Company Year 2000 compliance program. The Company is in the process of
completing Year 2000 compliance reviews and upgrades to software or systems
which are deemed critical to the Company's business. The Company expects to
complete this by mid 1999. Nevertheless, particularly to the extent the Company
is relying on the products of other vendors to resolve Year 2000 issues, there
can be no assurances that the Company will not experience delays in implementing
such products. If key systems, or a significant number of systems were to fail
as a result of Year 2000 problems or the Company were to experience delays
implementing Year 2000 compliant software products, the Company could incur
substantial costs and disruption of its business, which would potentially have a
material adverse effect on the Company's business and results of operations.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company 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. However, some of the Company's customers are running product versions that
are not Year 2000 compliant. The Company has been encouraging these customers to
migrate to current product versions. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with Year 2000 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 a growing number 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No items.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
26
<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
27
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
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' (DEFICIT) EQUITY
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.
28
<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 revenues 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 revenues 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.
29
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Common
---------------------------- -------------------------- 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 $ 54,085,000 $ --
Exercise of stock options -- -- 316,875 1,263,000 --
Conversion of Series B Preferred Stock to
Common Stock (172,500) (3,306,000) 406,617 3,306,000 --
Issuance of Series C Preferred Stock 100,000 1,964,000 -- -- --
Conversion of Series C
Preferred Stock to Common Stock (100,000) (1,964,000) 236,000 1,964,000 --
Conversion of note to Common Stock -- -- 125,000 965,000 --
Foreign currency translation adjustment -- -- -- -- --
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
------------ ------------- ---------- ------------ -------------
------------ ------------- ---------- ------------ -------------
<CAPTION>
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.
30
<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.
31
<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
realizability of deferred income tax assets, capitalized software costs,
goodwill, allowance for doubtful accounts and reserves for excess or obsolete
inventory.
32
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 ("SFAS") No. 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.
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
33
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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.
34
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 ("FAS 128"), "Earnings Per Share", for fiscal 1997 and retroactively
restated all prior periods to conform with FAS 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 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.
35
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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>
NOTE 3 - BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
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
36
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
and amortization (6,401,000) (5,690,000)
------------------- ------------------
$ 1,565,000 $ 2,270,000
------------------- ------------------
------------------- ------------------
</TABLE>
37
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
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
------------------ ------------------
------------------ ------------------
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
38
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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>
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
39
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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,
40
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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>
41
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 112% 78% 68%
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.
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
Shares exercise price Shares exercise price Shares exercise 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 .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 $.43 $ 4.02 $6.36
</TABLE>
42
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes information about employee stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding at remaining average exercisable at average
Exercise prices December 31, 1998 contractual life exercise price December 31, 1998 exercise price
- --------------- ----------------- ---------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$.25 to $.35 402,000 9.72 years $.26 93,000 $.25
$.46 to $.63 278,000 9.55 years $.60 59,000 $.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
------- -------
$.25 to $7.88 836,750 8.51 years $1.23 263,910 $2.20
------- -------
------- -------
</TABLE>
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
43
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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
---------------------------------------------------------------------
United Corporate
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
---------------------------------------------------------------------
United Corporate
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
---------------------------------------------------------------------
United Corporate
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.
44
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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
45
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
settlement in 1998 based on the 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(a) PREVIOUS INDEPENDENT ACCOUNTANTS
On February 17, 1999, Altris Software, Inc. dismissed
PricewaterhouseCoopers LLP ("PWC") as the principal independent accountants
engaged to audit the Company's financial statements. The Audit Committee of the
Company's Board of Directors approved the decision to change independent
accountants. In connection with its audits for the two most recent fiscal years
and through February 17, 1999, there have been no disagreements with PWC on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to PWC's
satisfaction would have caused PWC to make reference thereto in PWC's report on
the financial statements for such periods.
As previously disclosed, as a result of the Company's restatement of
its financial statements for the year ended December 31, 1996, on March 10,
1998, PWC notified the Company that it was withdrawing its report dated February
25, 1997 on the Company's financial statements for the year ended December 31,
1996. Upon restatement of those financial statements (in order to adjust the
timing and amount of revenues recognized, as previously disclosed), on May 12,
1998 PWC issued a new report on the Company's financial statements for the year
ended December 31, 1996. PWC noted in this report and in its report, dated May
12, 1998, on the Company's financial statements for the year ended December 31,
1997 that the Company's recurring losses and accumulated deficit raise
substantial doubt about its ability to continue as a going concern. PWC's
reports on the financial statements for December 31, 1997 and 1996 did not
contain an adverse opinion or a disclaimer of opinion and were not otherwise
qualified or modified as to audit scope or accounting principles.
During the two most recent fiscal years and through February 17,
1999, there has been a reportable event. In connection with PWC's audit of the
Company's restated financial statements for the year ended December 31, 1996 and
its financial statements for the year ended December 31, 1997, PWC reported to
the Audit Committee of the Board of Directors, at meetings held in the first
half of 1998, the following material weaknesses in the Company's internal
controls: (i) lack of sufficient U.S. oversight of the revenue recognition
practices of the Company's U.K. subsidiary; (ii) lack of adherence to existing
internal controls regarding assessment of credit worthiness and review of
contracts for propriety of revenue recognition; and (iii) lack of an adequate
internal control structure at the Company's U.K. subsidiary regarding a system
to track performance of services by contract, proof of shipment and sufficient
evidence of an agreement. In response to the restatement and the recommendations
of PWC, the Company has implemented changes to its internal control procedures
and oversight responsibilities.
(b) NEW INDEPENDENT ACCOUNTANTS
On February 17, 1999, the Company engaged Grant Thornton LLP,
independent public accountants, to audit the Company's financial statements for
the year ended December 31, 1998.
46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion sets forth certain information
concerning the Company's current directors and executive officers:
Name Age Position
- ----------------------- --- ------------------------------------
Roger H. Erickson 42 Chief Executive Officer and Director
D. Ross Hamilton 61 Director
Michael J. McGovern 69 Director
Larry D. Unruh 47 Director
Martin P. Atkinson 52 Director
David Chu 43 Vice President, Engineering
Steven D. Clark 47 Vice President, Sales
John W. Low 42 Chief Financial Officer and Secretary
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 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 currently serves as a director of
Luther Medical Products, Inc., a medical device manufacturer. Mr. Hamilton
received a B.S. degree in Economics from Auburn University in 1961.
Mr. McGovern has served as a Director of the Company since he
founded the Company in February 1981, and served as the Company's Chairman and
Chief Executive Officer from its inception until December 1987. Mr. McGovern was
a founder of Autologic, Inc. in 1968, where he was Vice President of Engineering
in charge of developing computer driven photo typesetters for the newspaper and
publishing industries. Mr. McGovern also serves as a director of Qtel, Inc.
(since March 1997) and as a director of Alpha Data Tech. (since April 1997). He
received a B.S.E.E. degree from City University of New York in 1952 and an
M.S.E.E. degree from Arizona State University in 1959.
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,
and also serves as a director of LK Business Services Inc., a specialty
automobile lubricant manufacturer. Mr. Unruh received a B.S. degree in
Accounting from the University of Denver in 1973.
47
<PAGE>
Mr. Atkinson has served as a Director of the Company since 1997. Mr.
Atkinson presently runs a consulting firm based in Kent, England that advises
middle-market companies on banking and corporate finance matters. Prior to
establishing his consulting firm, Mr. Atkinson was employed by Lloyds Bank for
28 years until his retirement from there (at the senior executive level) in
December 1996. While at Lloyds, Mr. Atkinson was the Head of Risk Control of
Lloyds Merchant Bank Limited, a Director of Lloyds' Capital Markets Group, where
he was responsible for arranging several multi-million pound syndicated loans,
and from 1992 to 1996, he was responsible for Lloyds' middle-market activities
in certain counties in England. Mr. Atkinson is an Associate of the Institute of
Bankers, England. He received a law degree from Nottingham University in England
in 1968.
Mr. Chu was appointed Vice President, Engineering in April 1998.
Since joining the Company in February 1997, Mr. Chu served as Director U.S.
Software Engineering until April 1998. From 1995 to 1997, Mr. Chu was an
independent consultant for Performance Solutions Group, a technical consulting
organization. From 1984 to 1995, Mr. Chu was with Computer Associates
International most recently as Assistant Vice President of Research and
Development. Mr. Chu holds triple certifications as a Microsoft Certified
Systems Engineer, Solutions Developer and Trainer.
Mr. Clark was appointed Vice President, Sales in October 1997.
Previously, Mr. Clark had served as Vice President North American Sales since
January 1997. From 1994 through the end of 1996, Mr. Clark was Director of U.S.
Sales. From 1992 to 1994, Mr. Clark served as the Vice President of West Coast
Operations at PRC, a systems integration firm. From 1987 to 1992, Mr. Clark was
Director of Marketing for Optigraphics Corporation. From 1983 to 1987, he was
Vice President of Sales and Marketing at Energy Images in Boulder, Colorado.
From 1975 to 1983, Mr. Clark held several positions with Dun & Bradstreet
Petroleum Information. Mr. Clark earned a B.A. degree in Geography from the
University of Colorado in 1974.
Mr. Low has served as Chief Financial Officer and Secretary since
June 1990. Previously, Mr. Low had served as Corporate Controller since joining
the Company in August 1987. From 1980 until joining the Company, Mr. Low was
with Price Waterhouse LLP, most recently as a Manager working with middle-market
and growing companies. Mr. Low, who is a certified public accountant, earned a
B.A. degree in Economics from the University of California, Los Angeles in 1978.
All directors are elected annually and serve until the next annual
meeting of shareholders and until their successors have been elected and
qualified.
All executive officers hold office at the discretion of the Board of
Directors.
Information relating to Directors is set forth in Registrant's
definitive proxy statement which is to be filed pursuant to Regulation 14A
within 120 days after the en of the Registrant's fiscal year ended December 31,
1998, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A within 120 days after the end of the Company's fiscal year ended December
31, 1998, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT
Information relating to Security Ownership of Certain Beneficial
Owners and Management is set forth in the Company's definitive proxy statement
which is to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1998, and such information is
incorporated herein by reference.
48
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related
Transactions is set forth in the Company's definitive proxy statement which is
to be filed pursuant to regulation 14A within 120 days after the end of the
Company's fiscal year ended December 31, 1998, and such information is
incorporated herein by reference.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES, AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Operations for the years ended December
31, 1998, 1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
<TABLE>
<CAPTION>
(3) EXHIBITS:
<S> <C>
3.1* Registrant's Articles of Incorporation, as amended
3.2* Registrant's Bylaws, as amended
4.1* Specimen Certificate of Common Stock
4.2* Specimen Certificate of Redeemable Common Stock Purchase Warrant
10.1* Purchase Agreement dated as of April 10, 1986, between Registrant and Lockheed
Corporation, including form of Cross License Agreement and Shareholder Agreement
10.2* Purchase Agreement dated as of August 26, 1986, between Registrant and Lockheed Corporation
10.3* 1987 Stock Option Plan, as amended April 27, 1994
10.4* Forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement under 1987 Stock
Option Plan
10.5* Amended and Restated 1996 Stock Incentive Plan
10.6* Form of Incentive Stock Option Agreement, Nonstatutory Stock Option Agreement and Restricted Stock
Agreement under Amended and Restated 1996 Stock Incentive Plan
10.7* Form of Indemnification Agreement with officers and directors
10.8* Sublease Agreement dated August 31, 1992 between the Company and Unisys Corporation
50
<PAGE>
10.9* Agreement and Plan of Merger and Reorganization dated as of July 7, 1993 by and among the Company,
AO Acquisition Corporation and Optigraphics Corporation
10.10* Amendment No. 1 to Agreement and Plan of Merger and Reorganization dated as of September 15, 1993 by
and among the Company, AO Acquisition Corporation and Optigraphics Corporation
10.11* WCMA and Term Loan Agreement dated July 6, 1994 between Optigraphics Corporation and Merrill Lynch
Business Financial Services, Inc.
10.12* Standard Industrial Lease dated April 1, 1994 between the Company and Utah State Retirement Fund, a
common trust fund
10.13* WCMA and Term Loan Agreement dated October 22, 1996 between Altris Software, Inc. and Merrill Lynch
Business Financial Services, Inc.
10.14* Continuing Guarantee dated August 30, 1996 between Alpharel, Inc. and Lloyds Bank Plc
10.15* Overdraft Facility and Other Facilities dated August 26, 1997 between Altris Software, Inc. and Lloyds
Bank Plc
10.16* Certificate of Determination of Series D Convertible Preferred Stock of the Company
10.17* 11.5% Subordinated Debenture due June 27, 2002 in principal amount of $3,000,000 issued by the
Altris Software, Inc. to Sirrom Capital Corporation, d/b/a/ Tandem Capital on June 27, 1997
10.18* Convertible Preferred Stock Purchase Agreement, dated as of June 27, 1997, by and between the Altris
Software Inc. and Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.19* Debenture Purchase Agreement, dated as of June 27, 1997, by and between Altris Software, Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.20* Registration Rights Agreement, dated as of June 27, 1997, by and between Altris Software Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.21 First Amendment to Debenture Purchase Agreement, dated as of November 1, 1998, by and between Altris
Software Inc. and Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.22 First Amendment to Subordinated Debenture, dated as of November 1, 1998, by and
between Altris Software Inc. and Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.23 Altris Software, Inc. Securities Litigation Memorandum of Understanding, as of March 1999.
10.24 Security Agreement, dated as of January 22, 1999, by and between Altris Software Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
21 Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Requirements for the Format and Input of Financial Data Schedules
</TABLE>
- -------------------
*Incorporated herein by this reference from previous filings with the Securities
and Exchange Commission.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on April 13, 1999.
ALTRIS SOFTWARE, INC.
By: /s/Roger H. Erickson
--------------------------------
Roger H. Erickson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Roger H. Erickson Director and Chief Executive April 13, 1999
- ---------------------------- Officer (Principal Executive Officer)
Roger H. Erickson
/s/ John W. Low Chief Financial Officer and Secretary April 13, 1999
- --------------------------- (Principal Financial and Accounting Officer)
John W. Low
/s/ Martin Atkinson Director April 13, 1999
- ---------------------------
Martin Atkinson
/s/ D. Ross Hamilton Director April 13, 1999
- ---------------------------
D. Ross Hamilton
/s/ Michael J. McGovern Director April 13, 1999
- ------------------------
Michael J. McGovern
/s/ Larry H. Unruh Director April 13, 1999
- ---------------------------
Larry D. Unruh
</TABLE>
52
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALTRIS SOFTWARE, INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Charged to
Description Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
of Period Expenses Describe Describe Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 285,000 $ 133,000 $ (224,000) (a) $ 194,000
Excess inventory reserve $ 511,000 $ 140,000 $ 651,000
Tax benefit reserve $ 18,523,000 $ 1,781,000(c) $ 20,304,000
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 171,000 $ 259,000 $ (145,000) (a) $ 285,000
Excess inventory reserve $ 552,000 $ 50,000 $ (91,000) (b) $ 511,000
Tax benefit reserve $ 17,262,000 $1,261,000 (c) $ 18,523,000
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 125,000 $ 140,000 $ (94,000) (a) $ 171,000
Excess inventory reserve $ 2,119,000 $ (1,567,000) (b) $ 552,000
Tax benefit reserve $ 17,600,000 $ (338,000) (d) $ 17,262,000
</TABLE>
(a) Amount written off
(b) Inventory scrapped or sold at less than cost
(c) Valuation allowance against benefit recorded
(d) Adjustment relating to tax provision or benefit expired
53
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
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 (IRS Employer
incorporation or organization) Identification No.)
9339 Carroll Park Drive, San Diego, CA 92121
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
----------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock on March 23, 1999, held
by non-affiliates* of the Registrant, based upon the last price reported on the
Nasdaq National Market on such date was $9,614,663.
The number of shares outstanding of the Registrant's Common Stock at
the close of business on March 23, 1999, was 9,614,663.
*Without acknowledging that any individual director of Registrant is an
affiliate, all directors have been included as affiliates with respect to shares
owned by them.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby amends the following items on Form 10-K for the
year ended December 31, 1998 as set forth below. Items not referenced below are
not amended. Items referenced herein are amended in their entirety as set forth
below.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion sets forth certain information
concerning the Company's current directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- --- ------------------------------------
<S> <C> <C>
Roger H. Erickson 42 Chief Executive Officer and Director
D. Ross Hamilton 61 Director
Michael J. McGovern 69 Director
Larry D. Unruh 47 Director
Martin P. Atkinson 52 Director
David Chu 43 Vice President, Engineering
Steven D. Clark 47 Vice President, Sales
John W. Low 42 Chief Financial Officer and Secretary
</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
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 currently serves as a director
of Luther Medical Products, Inc., a medical device manufacturer. Mr. Hamilton
received a B.S. degree in Economics from Auburn University in 1961.
Mr. McGovern has served as a Director of the Company since he
founded the Company in February 1981, and served as the Company's Chairman
and Chief Executive Officer from its inception until December 1987. Mr.
McGovern was a founder of Autologic, Inc. in 1968, where he was Vice
President of Engineering in charge of developing computer driven photo
typesetters for the newspaper and publishing industries. Mr. McGovern also
serves as a director of Qtel, Inc. (since March 1997) and as a director of
Alpha Data Tech. (since April 1997). He received a B.S.E.E. degree from City
University of New York in 1952 and an M.S.E.E. degree from Arizona State
University in 1959.
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
1
<PAGE>
company, and also serves as a director of LK Business Services Inc., a
specialty automobile lubricant manufacturer. Mr. Unruh received a B.S. degree
in Accounting from the University of Denver in 1973.
Mr. Atkinson has served as a Director of the Company since 1997. Mr.
Atkinson presently runs a consulting firm based in Kent, England that advises
middle-market companies on banking and corporate finance matters. Prior to
establishing his consulting firm, Mr. Atkinson was employed by Lloyds Bank
for 28 years until his retirement from there (at the senior executive level)
in December 1996. While at Lloyds, Mr. Atkinson was the Head of Risk Control
of Lloyds Merchant Bank Limited, a Director of Lloyds' Capital Markets Group,
where he was responsible for arranging several multi-million pound syndicated
loans, and from 1992 to 1996, he was responsible for Lloyds' middle-market
activities in certain counties in England. Mr. Atkinson is an Associate of
the Institute of Bankers, England. He received a law degree from Nottingham
University in England in 1968.
Mr. Chu was appointed Vice President, Engineering in April 1998.
Since joining the Company in February 1997, Mr. Chu served as Director U.S.
Software Engineering until April 1998. From 1995 to 1997, Mr. Chu was an
independent consultant for Performance Solutions Group, a technical
consulting organization. From 1984 to 1995, Mr. Chu was with Computer
Associates International, most recently as Assistant Vice President of
Research and Development. Mr. Chu holds triple certifications as a Microsoft
Certified Systems Engineer, Solutions Developer and Trainer.
Mr. Clark was appointed Vice President, Sales in October 1997.
Previously, Mr. Clark had served as Vice President North American Sales since
January 1997. From 1994 through the end of 1996, Mr. Clark was Director of
U.S. Sales. From 1992 to 1994, Mr. Clark served as the Vice President of West
Coast Operations at PRC, a systems integration firm. From 1987 to 1992, Mr.
Clark was Director of Marketing for Optigraphics Corporation. From 1983 to
1987, he was Vice President of Sales and Marketing at Energy Images in
Boulder, Colorado. From 1975 to 1983, Mr. Clark held several positions with
Dun & Bradstreet Petroleum Information. Mr. Clark earned a B.A. degree in
Geography from the University of Colorado in 1974.
Mr. Low has served as Chief Financial Officer and Secretary since
June 1990. Previously, Mr. Low had served as Corporate Controller since
joining the Company in August 1987. From 1980 until joining the Company, Mr.
Low was with Price Waterhouse LLP, most recently as a Manager working with
middle-market and growing companies. Mr. Low, who is a certified public
accountant, earned a B.A. degree in Economics from the University of
California, Los Angeles in 1978.
All directors are elected annually and serve until the next annual
meeting of shareholders and until their successors have been elected and
qualified.
All executive officers hold office at the discretion of the Board of
Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons who own more than 10%
of the Company's common stock to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
(the "SEC"). Executive officers, directors and 10% shareholders are required
by the SEC to furnish the Company with copies of all Forms 3, 4 and 5 that
they file.
Based solely on the Company's review of the copies of such forms it
has received and written representations from certain reporting persons that
they were not required to file a Form 5 for specified fiscal years, the
Company believes that all of its executive officers, directors and greater
than 10% shareholders have complied with all of the filing requirements
applicable to them with respect to transactions during 1998.
2
<PAGE>
COMPENSATION OF DIRECTORS
Each director, other than directors who are also employees of the
Company or are precluded from accepting a fee by their employers, receives a
$5,000 annual fee plus a $1,000 meeting fee for four paid meetings a year. In
addition, each director is reimbursed for all reasonable expenses incurred in
connection with attendance at such meetings. Directors who are employees of
the Company are not compensated for serving as directors.
In 1998, Mr. Unruh performed services for the Company in connection
with the audit restatement and management changes which totaled $13,713, plus
out-of-pocket expenses. Mr. Atkinson also performed services relating to
certain management changes. Total fees to Mr. Atkinson were $4,600 plus
out-of-pocket expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1998, the Compensation Committee of the Board of Directors was
comprised of four members, Messrs. McGovern, Hamilton and Unruh and Michael
Comegna (who resigned as a Director in April 1998), none of whom is or was an
employee or officer of the Company in 1998. No executive officer of the
Company has served as a member of the Board of Directors or Compensation
Committee of any company in which Messrs. McGovern, Hamilton, Unruh or
Comegna is an executive officer.
3
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
annual and long-term compensation for services rendered in all capacities to
the Company for the three years ended December 31, 1998 of (i) the Company's
Chief Executive Officer during 1998 and (ii) the four other most highly
compensated executive officers of the Company having compensation of $100,000
or more during 1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------
LONG-TERM
OTHER COMPENSATION
ANNUAL AWARDS--STOCK
COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (# SHARES)
- --------------------------------------- ------ --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Roger H. Erickson 1998 $164,635 - $131,215 65,000
Chief Executive Officer(2) 1997 $174,708 $ 9,000 - -
1996 $185,427 - - 25,000
Jay V. Tanna 1998 $ 57,885 - $104,393 -
Former President and Chief Executive 1997 $215,000 - - 75,000
Officer(3) 1996 $205,865 - - 112,500
David Chu 1998 $130,000 $10,000 - 48,000
Vice President, Engineering(4) 1997 $ 96,346 - - 20,000
1996 - - - -
Steven D. Clark 1998 $125,200 - $ 14,067 38,000
Vice President, Sales(5) 1997 $168,462 $25,000 - 40,000
1996 $136,355 - $ 66,719 -
John W. Low 1998 $147,000 - $100,245 28,000
Chief Financial Officer 1997 $149,639 - - -
and Secretary(6) 1996 $142,535 - - 25,000
Jay Patel 1998 $108,829 - - 23,000
Former Managing Director, UK 1997 $ 99,359 $13,549 - 15,000
Operations(7) 1996 $ 86,317 - - 2,500
</TABLE>
- -----------
(1) Excludes compensation in the form of other personal benefits, which for
each of the executive officers did not exceed the lesser of $50,000 or 10%
of the total annual salary and bonus reported for each year.
(2) Mr. Erickson became President and Chief Executive Officer of the Company
effective April 1998. The other annual compensation in 1998 is comprised of
$25,372 in commissions paid relating to Mr. Erickson's position as Vice
President, Strategic Partners in 1997, and $105,843 relating to
forgiveness of a promissory note which had been issued in connection with
the exercise of stock options that were due to expire. See Item 13. Certain
Relationships and Related Transactions.
(3) Mr. Tanna became President and Chief Executive Officer of the Company in
April 1996 and resigned from that position effective April 1, 1998. The
other annual compensation paid in 1998 is comprised of a $21,707 payment
for accrued vacation and $82,686 paid to Mr. Tanna under a Separation
Agreement. See Item 13. Certain Relationships and Related Transactions. The
options for 75,000 shares granted to Mr. Tanna in 1997 were subsequently
returned to the Company and cancelled. The remaining options for 112,500
shares expired in May 1998.
(4) Mr. Chu commenced his employment with the Company in February 1997.
(5) The bonus paid in 1997 related to services provided to the Company in 1996
as Director of U.S. Sales. The other annual compensation paid in 1998 and
1996 was for sales commissions.
(6) The other annual compensation to Mr. Low in 1998 is comprised of a $29,683
payment for accrued vacation and $70,562 relating to forgiveness of a
promissory note which had been issued in connection with the
4
<PAGE>
exercise of stock options that were due to expire. See Item 13. Certain
Relationships and Related Transactions.
(7) Mr. Patel's employment with the Company was terminated in January 1999. The
bonuses paid in 1997 related to services provided by Mr. Patel to the
Company in 1996 as Deputy Managing Director of U.K. Operations.
OPTION GRANTS IN 1998
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1998:
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM (5)
OPTIONS IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- -------------------------- ------------- ----------- -------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Erickson 15,000(2) 2% $0.63 6/30/08 $5,896 $14,941
50,000(3) 8% $0.25 9/14/08 $7,861 $19,922
David Chu 8,000(2) 1% $0.63 6/30/08 $3,144 $ 7,969
40,000(3) 6% $0.25 9/14/08 $6,289 $15,937
Steven D. Clark 8,000(2) 1% $0.63 6/30/98 $3,144 $ 7,969
30,000(3) 5% $0.25 9/14/98 $4,716 $11,953
John W. Low 8,000(2) 1% $0.63 6/30/08 $3,144 $ 7,969
20,000(3) 3% $0.25 9/14/08 $3,144 $ 7,969
Jay Patel 8,000(4) 1% $0.63 6/30/08 $3,144 $ 7,969
15,000(4) 2% $0.25 9/14/08 $2,358 $ 5,977
</TABLE>
- -----------
(1) All options were granted with an exercise price equal to the closing sale
price of the Common Stock as reported on the OTC Bulletin Board on the date
of grant.
(2) Options were granted in June 1998. The options vest 25% 90 days from the
date of grant and in additional annual installments of 25% commencing on
the first anniversary of the date of grant.
(3) Options were granted in September 1998. The options vest in quarterly
installments of 25% commencing three months after the date of grant.
(4) Options were granted in June and September 1998. The options originally
vested 25% 90 days form the date of grant and in additional annual
installments of 25% commencing on the first anniversary of the date of
grant. In January 1999, in connection with Mr. Patel's severance
arrangement, the Board of Directors approved accelerating these options to
be fully vested on March 15, 1999.
(5) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of its Common Stock.
The actual value, if any, which a Named Executive Officer may realize upon
the exercise of stock options will be based upon the difference between the
market price of the Company's Common Stock on the date of exercise and the
exercise price.
5
<PAGE>
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
The following table sets forth for the Named Executive Officers
information with respect to unexercised options and year-end option values, in
each case with respect to options to purchase shares of the Company's Common
Stock:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED HELD AS OF DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
ON VALUE ------------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- --------------------- --------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Erickson - - 16,250 48,750 $1,250 $3,750
David Chu - - 12,000 36,000 $1,000 $3,000
Steven D. Clark - - 24,500 28,500 $ 750 $2,250
John W. Low - - 35,750 27,250 $ 500 $1,500
Jay Patel - - 15,125 25,375 $ 375 $1,125
</TABLE>
- ----------
(1) Based on the closing sale price of the Company's Common Stock on the OTC
Bulletin Board on December 31, 1998 of $0.35 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to shares of the
Company's Common Stock owned as of April 15, 1999 by (i) each director;
(ii) each Named Executive Officer who is presently an employee of the Company;
(iii) all directors and executive officers as a group; and (iv) each person who,
to the extent known to the Company, beneficially owned 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>
NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(1)
- ---- ------------- ----------
<S> <C> <C>
Roger H. Erickson 92,250 *
David Chu 40,750 *
Steven D. Clark 39,500 *
John W. Low 92,750 *
D. Ross Hamilton 189,000 2.0%
Michael J. McGovern 349,501 3.6%
Larry D. Unruh 8,047 *
Martin P. Atkinson 3,750 *
Sirrom Capital Corporation 800,000(2) 7.7%
All Directors and Executive Officers as a Group (8 persons) 815,548 8.3%
</TABLE>
- -----------
*Less than one percent.
(1) Amounts and percentages include shares of Common Stock that may be acquired
within 60 days of April 15, 1999 through the exercise of stock options as
follows: 41,250 shares for Mr. Erickson, 40,750 shares for Mr. Chu, 39,500
shares for Mr. Clark, 45,750 shares for Mr. Low, 17,500 shares for Mr.
Hamilton, 3,750 shares for Mr. McGovern, 3,750 shares for Mr. Unruh, 3,750
shares for Mr. Atkinson, and 196,000 shares for all directors and executive
officers as a group.
(2) Amount consists of (i) 500,000 shares of Common Stock issuable upon
conversion of Series D Convertible Preferred Stock having a conversion
price of $6.00 per share and (ii) 300,000 shares of Common stock issuable
upon exercise of a warrant having an exercise price of $6.00 per share.
6
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1998, the Company and Mr. Tanna entered into a Separation
Agreement whereby Mr. Tanna resigned his positions as Chairman of the Board,
President and Chief Executive Officer. Under the Agreement, Mr. Tanna was to
act as an on-call consultant for any matters the Company may have referred to
him for his input and participation. His annual compensation for such
services was $215,000 plus medical, dental and car allowance benefits. The
Separation Agreement terminated on March 31, 1999. As part of a proposed
settlement of certain shareholder class action litigation, Mr. Tanna has
agreed to forego any claim for unpaid compensation of $131,000 under the
Separation Agreement and to surrender to the Company 35,000 shares of the
Company's common stock held in his name. In addition, Mr. Tanna and the
Company 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 the Company's bylaws,
California law and an indemnity agreement between the Company and Mr. Tanna
related to his services as a director and officer of the Company.
In October 1996, the Company loaned (i) Roger H. Erickson, then Vice
President, Operations, $92,812 and (ii) John W. Low, Chief Financial Officer and
Secretary, $61,875. Each loan was at a simple interest rate of 9.25% with a
maturity date of March 31, 1997. The loans were made to Messrs. Erickson and Low
in connection with their exercise of stock options that were due to expire. On
May 15, 1998, the Company agreed, as additional compensation to Messrs. Erickson
and Low, to forgive the promissory notes of such officers. The outstanding
principal and interest payable by Messrs. Erickson and Low under such notes were
$105,843 and $70,562, respectively, as of May 15, 1998.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on April 30, 1999.
ALTRIS SOFTWARE, INC.
By: /s/ Roger H. Erickson
---------------------------
Roger H. Erickson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Roger H. Erickson Director and Chief Executive April 30, 1999
- ---------------------------- Officer (Principal Executive Officer)
Roger H. Erickson.
/s/ John W. Low Chief Financial Officer and Secretary April 30, 1999
- ---------------------------- (Principal Financial and Accounting Officer)
John W. Low
/s/ Martin Atkinson Director April 30, 1999
- ----------------------------
Martin Atkinson
/s/ D. Ross Hamilton Director April 30, 1999
- ----------------------------
D. Ross Hamilton
/s/ Michael J. McGovern Director April 30, 1999
- ----------------------------
Michael J. McGovern
/s/ Larry D. Unruh Director April 30, 1999
- ----------------------------
Larry D. Unruh
</TABLE>
8
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15935
ALTRIS SOFTWARE, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
---------------------------------------------------
(Address of principal executive offices and zip code)
(619) 625-3000
---------------------------------------------------
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding at May 3, 1999: 9,615,163
-------------
Number of Sequentially Numbered Pages: 17
<PAGE>
ALTRIS SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 15
</TABLE>
2
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 391,000 $ 530,000
Receivables, net 495,000 1,128,000
Inventory, net 275,000 277,000
Other current assets 193,000 244,000
-------------- --------------
Total current assets 1,354,000 2,179,000
Property and equipment, net 1,368,000 1,565,000
Computer software, net 4,510,000 4,685,000
Goodwill, net 1,983,000 2,645,000
Other assets 270,000 292,000
-------------- --------------
Total assets $ 9,485,000 $ 11,366,000
-------------- --------------
-------------- --------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,921,000 $ 2,779,000
Accrued liabilities 2,095,000 1,934,000
Notes payable 700,000 745,000
Deferred revenue 3,667,000 3,230,000
-------------- --------------
Total current liabilities 9,383,000 8,688,000
Long term notes payable 421,000 468,000
Deferred revenue, long term portion 1,963,000 2,131,000
Other long term liabilities 1,162,000 1,263,000
Subordinated debt, net of discount 2,620,000 2,591,000
-------------- --------------
Total liabilities 15,549,000 15,141,000
Commitments - -
Mandatorily redeemable convertible preferred stock,
$1,000 par value, 3,000 shares authorized;
3,000 shares issued and outstanding ($3,455,000 and
$3,350,000 total liquidation preference, respectively) 3,108,000 3,003,000
Shareholders' deficit:
Common stock, no par value, 20,000,000 shares authorized;
9,615,163 and 9,614,663 issued and outstanding,
respectively 61,096,000 61,201,000
Common stock warrants 585,000 585,000
Accumulated other comprehensive income 65,000 (10,000)
Accumulated deficit (70,918,000) (68,554,000)
-------------- --------------
Total shareholders' deficit (9,172,000) (6,778,000)
-------------- --------------
Total liabilities and shareholders' deficit $ 9,485,000 $ 11,366,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
3
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Licenses $ 772,000 $ 891,000
Services and other 1,613,000 2,110,000
-------------- --------------
Total revenue 2,385,000 3,001,000
Cost of revenues:
Licenses 305,000 294,000
Services and other 1,067,000 1,507,000
-------------- --------------
Total cost of revenues 1,372,000 1,801,000
-------------- --------------
Gross profit 1,013,000 1,200,000
-------------- --------------
Operating expenses:
Research and development 1,011,000 743,000
Marketing and sales 765,000 1,669,000
General and administrative 1,447,000 1,410,000
-------------- --------------
Total operating expenses 3,223,000 3,822,000
-------------- --------------
Loss from operations (2,210,000) (2,622,000)
Interest and other income 9,000 15,000
Interest and other expense (163,000) (163,000)
-------------- --------------
Net loss $ (2,364,000) $ (2,770,000)
-------------- --------------
-------------- --------------
Basic net loss per common share $ (.26) $ (.30)
-------------- --------------
-------------- --------------
Diluted net loss per common share $ (.26) $ (.30)
-------------- --------------
-------------- --------------
Shares used in computing basic and diluted
net loss per common share 9,615,000 9,615,000
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (2,364,000) $ (2,770,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,085,000 594,000
Changes in assets and liabilities:
Receivables, net 633,000 1,201,000
Inventory 2,000 (15,000)
Other assets 51,000 135,000
Accounts payable 142,000 (527,000)
Accrued liabilities 161,000 (422,000)
Deferred revenue 269,000 1,081,000
Other long term liabilities (101,000) 52,000
--------------- --------------
Net cash used in operating activities (122,000) (671,000)
-------------- --------------
Cash flows from investing activities:
Maturity of short term investment - 95,000
Purchases of property and equipment - (78,000)
Purchases of software - (118,000)
Computer software capitalized - (561,000)
-------------- --------------
Net cash used in investing activities - (662,000)
-------------- --------------
Cash flows from financing activities:
Repayments of revolving loan and bank agreements (100,000) (50,000)
Net borrowings under revolving loan and bank agreements 8,000 826,000
Payment of preferred stock dividends - (87,000)
-------------- --------------
Net cash (used in) provided by financing activities (92,000) 689,000
-------------- --------------
Effect of exchange rate changes on cash 75,000 (30,000)
-------------- --------------
Net decrease in cash and cash equivalents (139,000) (674,000)
Cash and cash equivalents at beginning of period 530,000 1,938,000
-------------- --------------
Cash and cash equivalents at end of period $ 391,000 $ 1,264,000
-------------- --------------
-------------- --------------
Supplemental cash flow information:
Interest paid $ 108,000 $ 101,000
-------------- --------------
-------------- --------------
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 105,000 $ 87,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
5
<PAGE>
ALTRIS SOFTWARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Liquidity and Capital Resources
- ----------------------------------------
Altris Software, Inc. (the "Company") has suffered recurring losses,
and has an accumulated deficit of $70,918,000, a working capital deficit of
$8,029,000 and a deficit in shareholders' equity of $9,172,000 as of March
31, 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, 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 systems 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. In May
1999, the Company entered into a multi-part agreement with Spescom Ltd. to
make certain investments in the Company and its wholly-owned U.K. subsidiary.
See Part II Other Information, Item 5--Subsequent Event.
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 1998 Annual Report to Shareholders of the Company.
It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
The accompanying consolidated balance sheet of the Company as of
March 31, 1999 and the consolidated statement of operations and of cash flows
for the three month periods ended March 31, 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. All significant intercompany
balances and transactions have been eliminated.
Note 3 - Receivables
- --------------------
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Billed receivables $ 529,000 $ 1,193,000
Unbilled receivables 99,000 129,000
Less allowance for doubtful accounts (133,000) (194,000)
--------------- ---------------
$ 495,000 $ 1,128,000
--------------- ---------------
--------------- ---------------
</TABLE>
Note 4 - Inventory
- ------------------
Inventory consists of parts, supplies, and subassemblies primarily used
in maintenance contracts which service the Company's hardware products sold in
prior years. Inventory is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. As of March 31, 1999 and
December 31, 1998, the Company has provided a reserve of $721,000 and $651,000,
respectively, to reduce the carrying amount to estimated net realizable value.
Note 5 - Notes Payable and Subordinated Debt
- --------------------------------------------
Notes payable and subordinated debt consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
United Kingdom overdraft facility $ 383,000 $ 375,000
Revolving loans 738,000 838,000
Subordinated debt, less discount of $380,000 and
$409,000, respectively 2,620,000 2,591,000
----------- -----------
$ 3,741,000 $ 3,804,000
----------- -----------
----------- -----------
</TABLE>
In October 1998, the Company's United Kingdom subsidiary renewed an
overdraft facility with a bank. Interest is calculated at 3.0% per annum over
the bank's base rate (8.5% and 9.5% at March 31, 1999 and December 31, 1998,
respectively). Currently the facility is for $403,000 ((pound)250,000) and is
payable on demand. At March 31, 1999, $383,000 was outstanding under the
facility. At December 31, 1998, $375,000 was outstanding. Repayment of the
borrowings under the facility are collateralized by the property and assets of
the
6
<PAGE>
Company's United Kingdom subsidiary, including a (pound)100,000 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%
(7.77% and 8.05% at March 31, 1999 and December 31, 1998, respectively). At
March 31, 1999, $738,000 was outstanding under these two agreements 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
agreements contain certain restrictive covenants including the maintenance of a
minimum ratio of debt to tangible net worth. As of March 31, 1999, 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 (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
Part II. Other Information, Item 5 - Subsequent Event.
Note 6 - 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 Part II. Other Information, Item 5 -
Subsequent Event.
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
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
7
<PAGE>
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 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. 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
Part II. Other Information, Item 5 - Subsequent Event.
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 March
31, 1998 accumulated unpaid dividends amounted to $455,000.
Note 7 - Reconciliation of Net Loss and Shares Used in Per Share Computations:
- ------------------------------------------------------------------------------
Basic net loss per common share is computed as net loss plus accretion
of dividends on mandatorily redeemable convertible preferred stock divided by
the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed as net loss divided by the
weighted average number of common shares and potential common shares, using the
treasury stock method, outstanding during the period and assumes conversion into
common stock at the beginning of each period of all outstanding shares of
convertible preferred stock. Computations of basic and diluted earnings per
share do not give effect to individual potential common stock instruments for
any period in which their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
For the three months
ended March 31,
------------------------------------
1999 1998
<S> <C> <C>
Net Loss Used:
Net loss $ (2,364,000) $ (2,770,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (105,000) (87,000)
--------------- --------------
Net loss used in computing basic and diluted net
loss per share $ (2,469,000) $ (2,857,000)
--------------- --------------
--------------- --------------
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 9,615,000 9,615,000
--------------- --------------
--------------- --------------
</TABLE>
Note 8 - Segment and Geographic Information
- -------------------------------------------
The Company has one business segment which consists of the
development and sale of a suite of client/server document management software
products. One customer accounted for 17% of the Company's total revenues in
the quarter ended March 31, 1999.
Revenues for March 31, 1999 and 1998 by customer and location are as
follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
United States $ 1,615,000 $ 1,783,000
Europe, primarily United Kingdom 690,000 1,097,000
Other International 80,000 121,000
----------- -----------
$ 2,385,000 $ 3,001,000
----------- -----------
----------- -----------
</TABLE>
Information by geographic location for the quarter ended March 31,
1999 and 1998 follows:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------ ------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,279,000 $ 1,106,000 $ 2,385,000
Operating loss (567,000) (632,000) $(1,011,000) (2,210,000)
Identifiable assets 4,443,000 5,042,000 9,485,000
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------ ------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,916,000 $ 1,085,000 $ 3,001,000
Operating loss (965,000) (915,000) $(742,000) (2,622,000)
Identifiable assets 7,980,000 5,959,000 13,939,000
</TABLE>
A majority of the Europe revenue, net sales and operating 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.
Note 9 - 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 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
8
<PAGE>
the class and approval by the court. The Stipulation of Settlement was
executed on May 13, 1999. The stipulation provides that within ten days the
parties will submit the stipulation and its exhibits to the court and jointly
apply for entry of an order preliminarily approving the settlement,
prescribing procedures for notice to class members and setting a hearing for
the final approval of the settlement. 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 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.
Note 10 - Subsequent Event
- --------------------------
In May 1999, the Company entered into a multi-part agreement with
Spescom Ltd. to make certain investments in the Company and its wholly-owned
U.K. subsidiary. See Part II. Other Information, Item 5 - Subsequent Event.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
Revenues
Revenues for the three months ended March 31, 1999 were $2,385,000
as compared to $3,001,000 for the three months ended March 31, 1998 .
First quarter 1999 revenues consisted of $772,000 (32%) in software
licenses and $1,613,000 (68%) related to services and other revenue. This
compares to first quarter 1998 software license revenues of $891,000 (30%) and
services and other revenue of $2,110,000 (70%).
For the quarter ended March 31, 1999, software licenses revenues
decreased $119,000, while revenues generated from services and other
decreased $497,000. Management believes that the Company's inability to
provide the Altris EB product as originally planned in 1997, which was to
address the needs of new customers' for additional features and
functionality, coupled with customers uncertainty regarding the financial
condition of the Company, was the principal cause for the decline in software
licenses, services and other revenues. 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.
Management believes that these expenditures have reduced funds available to
purchase software products such as those offered by the Company.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue. In the first three months of 1999,
one customer accounted for 17% of total revenues. No customer accounted for more
than 10% of total revenues in the first quarter of 1998. One consequence of this
dependence has been that revenue can fluctuate significantly on a quarterly
basis. The Company's reliance on relatively few customers could have a material
adverse effect on the results of its operations on a quarterly basis.
Additionally, a significant portion of the Company's revenues has historically
been derived from the sale of systems to new customers.
Cost of Revenues
Cost of license revenues consists of costs associated with reselling
third-party software products and amortization of internal software
development costs. Gross profit as a percentage of license revenues was 60%
for the first quarter 1999 compared to 67% for the same period a year ago.
The decrease in the gross profit margin from licenses was due principally to
increased amortization of software development costs in the first quarter
1999 compared to 1998, due to the Company's release of its EB product.
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 as a percentage of
services and other revenue was 34% for the first quarter 1999 compared to 29%
in the prior year. 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.
10
<PAGE>
Operating Expenses
Research and development expense for the three months ended March
31, 1999 was $1,011,000 versus $743,000 for the same period in the prior
year. Research and development expense can vary year to year based on the
amount of engineering service contract work required for customers versus
purely internal development projects. It may also vary based on internal
development projects in which technological feasibility and marketability of
a product are established. These costs are capitalized as incurred and then
amortized when the product is available for general release to customers. The
increase in research and development in the first quarter 1999 was due
primarily to the release of the Company's EB product, which resulted in the
associated development costs being expensed rather than capitalized resulting
in relatively lower research and development expenses. This increase in EB
development costs was offset partially by a reduction in personnel costs.
Marketing and sales expense for the three months ended March 31, 1999
was $765,000 versus $1,669,000 for the three months ended March 31, 1998. The
decrease was primarily due to lower personnel and associated costs. In addition,
as a result of the delay in releasing Altris EB, the Company's next generation
document management software, the Company reduced marketing and promotional
costs in the first quarter 1999 compared to the same period a year ago.
General and administrative expense was $1,447,000 for the three
months ended March 31, 1999 as compared to $1,410,000 for the three months
ended March 31, 1998. The increase in general and administration expense was
primarily due to increased goodwill amortization. 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 goodwill due to recurring
significant losses and negative cash flow of the subsidiary. Goodwill
amortization for the first quarter 1999 was $661,000 compared to $203,000 for
the same period in 1998. The increase in goodwill amortization was offset
partially by a decrease in personnel costs. In addition, general and
administrative expenses included $175,000 in related severance costs in the
first quarter 1999. In the quarter ended March 31, 1998, the Company incurred
$376,000 in charges resulting primarily from severance costs including
amounts owed under a Separation Agreement between the Company and its former
CEO.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash and cash equivalents totaled
$391,000 as compared to $530,000 at December 31, 1998, and its current ratio
was .1 to 1. The Company has two revolving credit facilities that provide for
borrowings of up to $738,000. At March 31, 1999, $738,000 was outstanding on
the revolving loan agreements. In addition, the Company's U.K. subsidiary has
an overdraft credit facility of $403,000 ((pound)250.000). The outstanding
balance on this facility is payable on demand of the lender. At March 31,
1999, borrowings on this facility were $383,000. The Company has guaranteed
the borrowings on this facility. The Company and the bank agreed to extend
the facility from January 15, 1999 to April 30, 1999 for total borrowings not
to exceed $403,000 ((pound)250,000). Interest shall be payable at 3% per
annum over the bank's base rate. See Note 5 of the Condensed Notes to the
Consolidated Financial Statements. In May 1999, in connection with Spescom
Ltd's acquisition of a 60% interest in the U.K. subsidiary, Spescom has
agreed to indemnify the Company for any claim with respect to the Company's
guarantee to the bank. See Part II. Other Information, Item - 5 Subsequent
Event.
As a result of misapplications in its revenue recognition policies,
the Company, in 1998, restated its previously presented interim financial
information and annual financial statements for 1996 and the interim
information for the first three quarters of 1997. The restatement triggered
events of default under each of the Company's revolving loan agreements and
under the Subordinated Debenture. The lenders under such agreements and the
Subordinated Debenture agreed to waive such events of default. The Lender has
also waived compliance with certain financial covenants through March 15,
2000. There can be no assurances that the Company will be able to secure from
its lenders a further waiver of any events of default, including any events
of default occurring after March 15, 2000 under the financial covenants of
the revolving loan agreements. If such events of default are not then waived,
the Company may then be required to repay the full amount of its outstanding
indebtedness under the revolving credit agreements and the Subordinated
Debenture. Defaults in the payment of such indebtedness or in the performance
of other covenants under the agreements related to such indebtedness, whether
occurring prior to or after March 15, 2000, could also result in the Company
being required to repay the full amount of such indebtedness. In addition
because the overdraft credit facility of the Company's U.K. subsidiary is
payable upon demand, the Company could be required at any time to repay all
outstanding borrowings under such facility. The repayment of such
11
<PAGE>
indebtedness would require additional debt or equity financing. There can be no
assurances that any such financing would be available.
During the first quarter of 1999, cash used in operating and
financing activities totaled $122,000 and $92,000, respectively, while the
Company did not use any cash in investing activities. During the first
quarter of 1998, cash provided by financing activities totaled $689,000 while
cash used in operating and investing activities totaled $671,000 and
$662,000, respectively. Cash provided by financing activities was from net
borrowings under revolving loan and bank agreements.
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 other means 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 effect on the Company's business, results of operations, and
financial condition. See Part II. Other Information, Item - 5 Subsequent
Event.
Net Operating Loss Tax Carryforwards
As of December 31, 1998, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $42,000,000
and $9,429,000, respectively which expires 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,
the Company may be required to pay more Federal income taxes or to pay such
taxes sooner than if the use of its NOL and credit carryforwards were not
restricted.
Over the past five years, the Company has issued equity securities in
connection with the private placement in June 1997, the Trimco acquisition in
December 1995, the Optigraphics acquisition in September 1993 and through
traditional stock option grants to employees. Although there was no "ownership
change" in 1998, this activity increases the potential for an "ownership change"
for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired
$926,000 in deferred tax assets of which approximately $626,000 was provided as
a valuation allowance. In June 1997, the $300,000 tax asset was realized. In the
event that 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.
12
<PAGE>
In connection with the acquisition of Optigraphics, the Company
acquired Optigraphics' net operating losses which are limited to offset against
that entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Uncertain Impact of Restatement of Financial Statements
As a result of the misapplications in its revenue recognition policies,
the Company in 1998 restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. In connection with the misapplications,
conditions which collectively represented material weaknesses in the Company's
internal accounting controls were identified. These conditions included a lack
of (i) sufficient oversight by the Company in regard to revenue recognition
practices of the Company's U.K. subsidiary, (ii) adherence to existing internal
controls and (iii) an adequate internal control structure in the Company's U.K.
subsidiary.
To address the material weaknesses represented by these conditions, the
Company adopted a plan to strengthen the Company's internal accounting controls.
This plan included updating the Company's revenue recognition policies regarding
accounting and reporting for its customer contracts and contracts with Value
Added Resellers (VARs). The Company has implemented these policies.
The report of the Company's independent accountants, Grant Thornton LLP, on the
Company's Consolidated Financial Statements as of and for the year ended
December 31, 1998 includes an explanatory paragraph regarding the Company's
ability to continue as a going concern. See "Report of Independent Certified
Public Accountants" accompanying the Consolidated Financial Statements. The
Company's restatement of its financial statements, de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to meet certain listing requirements, corporate actions to restructure
operations and reduce operating expenses, and customer uncertainty regarding the
Company's financial condition have had, and are likely to have in the future, a
material adverse effect on the Company and its ability to sell its products in
future.
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. In the first quarter 1999,
revenue from the United States, Europe and other locations in the world were
68%, 29% and 3%, respectively. This compares to 59%, 37% and 4%, respectively
for the same period in 1998. The European currencies have been relatively stable
against the U.S. dollar for the past several years. As a result, foreign
currency fluctuations have not had a significant impact on the Company's
revenues or results of operations. The Company has recently increased its sales
efforts in international markets outside Europe, including Asia and Latin
America, whose currencies have tended to fluctuate more relative to the U.S.
dollar. In addition, the current continued weakness in Asian currencies may
result in reduced revenues from the countries affected by this condition.
Changes in foreign currency rates, the condition of local economies, and the
general volatility of software markets may result in higher or lower proportion
of foreign revenues in the future. Although the Company's operating and pricing
strategies take into account changes in exchange rates over time, there can be
no assurance that future fluctuations in the value of foreign currencies will
not have a material adverse effect on the Company's business, operating results
and financial condition.
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.
13
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' computer systems and/or
software may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has commenced a program, to be substantially completed by
the Fall of 1999, to review the Year 2000 compliance status of the software and
systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. Implementation of software
products from third parties, however, will require the dedication of
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999 as a part of
the Company Year 2000 compliance program. The Company is in the process of
completing Year 2000 compliance reviews and upgrades to software or systems
which are deemed critical to the Company's business. The Company expects to
complete this by mid 1999. Nevertheless, particularly to the extent the Company
is relying on the products of other vendors to resolve Year 2000 issues, there
can be no assurances that the Company will not experience delays in implementing
such products. If key systems, or a significant number of systems were to fail
as a result of Year 2000 problems or the Company were to experience delays
implementing Year 2000 compliant software products, the Company could incur
substantial costs and disruption of its business, which would potentially have a
material adverse effect on the Company's business and results of operations.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company 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. However, some of the Company's customers are running product versions that
are not Year 2000 compliant. The Company has been encouraging these customers to
migrate to current product versions. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with Year 2000 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 a growing number 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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
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 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 Stipulation of Settlement
was executed on May 13, 1999. The stipulation provides that within ten days
the parties will submit the stipulation and its exhibits to the court and
jointly apply for entry of an order preliminarily approving the settlement,
prescribing procedures for notice to class members and setting a hearing for
the final approval of the settlement. 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 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.
Item 5 - Subsequent Event
- --------------------------
In May 1999 the Company entered into a multi-part agreement with
Spescom Ltd., a South African company publicly traded on the Johannesburg
Exchange, whereby Spescom has invested $1.8 million for 2 million shares of
the Company's common stock. In addition, as part of the agreement, Spescom
will pay the Company an additional $1.0 million and invest $1.2 million
directly into Altris Software Ltd.("ASL"), the U.K. subsidiary of the
Company, for a 60% ownership of ASL. In conjunction with the agreement the
Company will contribute $400,000 into ASL and will retain a 40% interest in
ASL.
In addition, the Company has 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 for the same territory of
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
Finova Capital (formerly Sirrom Capital), a debt holder and preferred
stockholder of the Company, the interest rate on the Company's outstanding
debenture held by Finova was increased from 11.5% to 12%. In addition, the
conversion rate on the convertible preferred stock held by Finova has been
adjusted from $6.00 per share of common stock to $1.90 and the exercise price
on warrants entitling Finova to purchase 400,000 shares of the Company's
common stock was also adjusted from $6.00 to $1.90 per share.
15
<PAGE>
In addition, other terms of the transaction include:
- Spescom will have the right to appoint one representative on
the Company's board of directors;
- An additional 1,000,000 shares will be issued to Spescom if
court approval of the settlement of the Company's outstanding
securities litigation is not received by, as anticipated,
September 30, 1999;
- The Company will apply $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 shares of stock representing the Company's 40% interest
in ASL will be 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.
Item 6 - Exhibits and Reports on Form 8-K:
- ------------------------------------------
(a) Form 8-K, dated February 23, 1999
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTRIS SOFTWARE, INC.
By: /s/John W. Low
------------------------------------
John W. Low
Chief Financial Officer
Dated: May 14, 1999
-------------------------
17
<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, 1999
[ ] 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, 1999: 11,618,163
---------------
Number of Sequentially Numbered Pages: 18
<PAGE>
ALTRIS SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
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 12
PART II. OTHER INFORMATION 17
</TABLE>
2
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 1999 December 31, 1998
------------------ -----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 422,000 $ 530,000
Receivables, net 560,000 1,128,000
Inventory, net 153,000 277,000
Other current assets 160,000 244,000
------------ ------------
Total current assets 1,295,000 2,179,000
Property and equipment, net 566,000 1,565,000
Computer software, net 4,239,000 4,685,000
Goodwill, net 51,000 2,645,000
Other assets 249,000 292,000
Restricted cash 200,000 -
------------ ------------
Total assets $ 6,600,000 $11,366,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,541,000 $ 2,779,000
Accrued liabilities 1,520,000 1,934,000
Notes payable 417,000 745,000
Deferred revenue 2,452,000 3,230,000
------------ ------------
Total current liabilities 5,930,000 8,688,000
Long term notes payable 219,000 468,000
Deferred revenue, long term portion 1,823,000 2,131,000
Other long term liabilities 1,353,000 1,263,000
Subordinated debt, net of discount 2,649,000 2,591,000
------------ ------------
Total liabilities 11,974,000 15,141,000
------------ ------------
Mandatorily redeemable convertible preferred stock, $1,000 par value, 3,000
shares authorized; 3,000 shares Issued and outstanding ($3,560,000 total
liquidation preference) 3,213,000 3,003,000
Shareholders' deficit:
Common stock, no par value, 20,000,000 shares authorized;
11,616,913 and 9,614,663 issued and outstanding, respectively 62,792,000 61,201,000
Common stock warrants 677,000 585,000
Accumulated other comprehensive income - (10,000)
Accumulated deficit (72,056,000) (68,554,000)
------------ ------------
Total shareholders' deficit (8,587,000) (6,778,000)
------------ ------------
Total liabilities and shareholders' deficit $ 6,600,000 $ 11,366,000
------------ ------------
------------ ------------
</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
--------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 382,000 $ 1,169,000 $ 1,154,000 $ 2,060,000
Services and other 1,140,000 2,365,000 2,753,000 4,475,000
-------------- ------------- ------------- -------------
Total revenues 1,522,000 3,534,000 3,907,000 6,535,000
-------------- ------------- ------------- -------------
Cost of revenues:
Licenses 285,000 295,000 590,000 589,000
Services and other 735,000 1,793,000 1,802,000 3,300,000
-------------- ------------- ------------- -------------
Total cost of revenues 1,020,000 2,088,000 2,392,000 3,889,000
-------------- ------------- ------------- -------------
Gross profit 502,000 1,446,000 1,515,000 2,646,000
-------------- ------------- ------------- -------------
Operating expenses:
Research and development 837,000 608,000 1,848,000 1,351,000
Marketing and sales 397,000 1,066,000 1,162,000 2,735,000
General and administrative 443,000 1,303,000 1,890,000 2,713,000
-------------- ------------- ------------- -------------
Total operating expenses 1,677,000 2,977,000 4,900,000 6,799,000
-------------- ------------- ------------- -------------
Loss from operations (1,175,000) (1,531,000) (3,385,000) (4,153,000)
Interest and other income 186,000 3,000 195,000 18,000
Interest and other expense (149,000) (169,000) (312,000) (332,000)
-------------- -------------- -------------- --------------
Net loss $ (1,138,000) $ (1,697,000) $ (3,502,000) $ (4,467,000)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Basic net loss per common share $ (.11) $ (.19) $ (.32) $ (.49)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted net loss per common share $ (.11) $ (.19) $ (.32) $ (.49)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Shares used in computing basic and
diluted net loss per common share 11,616,000 9,615,000 11,616,000 9,615,000
</TABLE>
The accompanying condensed notes are an integral part of
these consolidated financial statements
4
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (3,502,000) $ (4,467,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,547,000 1,189,000
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 309,000 1,418,000
Inventory 116,000 56,000
Other assets 38,000 151,000
Accounts payable (432,000) (1,000)
Accrued liabilities 413,000 (448,000)
Deferred revenue (134,000) 1,397,000
Other long term liabilities (110,000) 19,000
-------------- --------------
Net cash used in operating activities (1,845,000) (640,000)
-------------- --------------
Cash flows from investing activities:
Maturity of short term investment - 133,000
Purchases of property and equipment (11,000) (81,000)
Purchases of software - (158,000)
Computer software capitalized - (1,131,000)
Net proceeds from sale of 60% interest in ASL 1,930,000 -
-------------- --------------
Net cash provided by (used in) investing activities 1,919,000 (1,237,000)
-------------- --------------
Cash flows from financing activities:
Repayments under notes payable (193,000) (133,000)
Net borrowings under revolving loan and bank agreements - 879,000
Payment of preferred stock dividends - (87,000)
Proceeds from exercise of stock options 1,000 -
-------------- --------------
Net cash (used in) provided by financing activities (192,000) 659,000
-------------- --------------
Effect of exchange rate changes on cash 10,000 (43,000)
-------------- ---------------
Net decrease in cash and cash equivalents (108,000) (1,261,000)
Cash and cash equivalents at beginning of period 530,000 1,938,000
-------------- --------------
Cash and cash equivalents at end of period $ 422,000 $ 677,000
-------------- --------------
-------------- --------------
Supplemental cash flow information:
Interest paid $ 213,000 $ 232,000
-------------- --------------
-------------- --------------
Schedule of noncash financing activities:
Accretion of dividends on mandatorily redeemable
convertible preferred stock $ 210,000 $ 111,000
-------------- --------------
-------------- --------------
</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 - LIQUIDITY AND CAPITAL RESOURCES
Altris Software, Inc. ("the Company") has suffered recurring losses,
and has an accumulated deficit of $72,056,000, a working capital deficit of
$4,485,000 and a deficit in shareholders' equity of $8,587,000 as of June 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 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 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 - 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 June
30, 1999 and the consolidated statement of operations and of cash flows for the
six month periods ended June 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.
As of June 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 31, 1999.
NOTE 3 - SPESCOM TRANSACTION
In May 1999, the Company completed a transaction with Spescom Ltd., a
South African company publicly traded on the Johannesburg Exchange, whereby
Spescom invested $1.8 million for 2 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
6
<PAGE>
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 June 30, 1999 December 31, 1998
---------------- ------------- -----------------
(Unaudited)
<S> <C> <C>
Billed receivables $ 584,000 $ 1,193,000
Unbilled receivables 66,000 129,000
Less allowance for doubtful accounts (90,000) (194,000)
---------------- ----------------
$ 560,000 $ 1,128,000
---------------- ----------------
---------------- ----------------
<CAPTION>
Other long-term liabilities
---------------------------
<S> <C> <C>
Accrued loss on office closure $ 6,000 $ 77,000
Settlement of lawsuits 1,128,000 1,128,000
Deferred gain on Spescom transaction 200,000 -
Other 19,000 58,000
---------------- ----------------
$ 1,353,000 $ 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 June 30, 1999 and
December 31, 1998, the Company had a reserve of $791,000 and $651,000,
respectively, to reduce the carrying amount of inventory to its estimated net
realizable value.
7
<PAGE>
NOTE 6 - NOTES PAYABLE AND SUBORDINATED DEBT
Notes payable and subordinated debt consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Revolving loans $ 636,000 $ 838,000
Subordinated debt, less discount of $351,000 and
$409,000, respectively 2,649,000 2,591,000
United Kingdom overdraft facility - 375,000
----------- -----------
$ 3,285,000 $ 3,804,000
----------- -----------
----------- -----------
</TABLE>
The Company has two revolving loan and security agreements, each
provided 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%
(7.85% and 8.05% at June 30, 1999 and December 31, 1998, respectively). At June
30, 1999, $636,000 was outstanding under these two agreements 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 agreements contain
certain restrictive covenants including the maintenance of a minimum ratio of
debt to tangible net worth. As of June 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 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
(pound)100,000 certificate on deposit. As a result of the Spescom transaction,
the indebtedness on this facility is no longer included in the Company's
liablities. 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
8
<PAGE>
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
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 June
30, 1999 accumulated unpaid dividends amounted to $560,000.
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.
9
<PAGE>
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss Used:
Net loss $(1,138,000) $(1,697,000) $(3,502,000) $(4,467,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (105,000) (105,000) (210,000) (198,000)
----------- ----------- ----------- -----------
Net loss used in computing basic and
diluted net loss per share $(1,243,000) $(1,802,000) $(3,712,000) $(4,665,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss
per common share 11,616,000 9,615,000 11,616,000 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 six months ended June 30, 1999.
Revenues for the three and six months ended June 30, 1999 and 1998 by
customer location are as follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 1,442,000 $ 2,109,000 $ 3,057,000 $ 3,891,000
Europe, primarily United Kingdom 53,000 1,171,000 743,000 2,268,000
Other International 27,000 254,000 107,000 376,000
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
$ 1,522,000 $ 3,534,000 $ 3,907,000 $ 6,535,000
</TABLE>
Information by geographic location for the three and six months ended
June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
------------------------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,522,000 $ - $ 1,522,000
Operating loss (338,000) - $ (837,000) (1,175,000)
Identifiable assets 6,600,000 - 6,600,000
<CAPTION>
Three months ended June 30, 1998
------------------------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 2,229,000 $ 1,305,000 $ 3,534,000
Operating Income (loss) 20,000 584,000 $(2,135,000) (1,531,000)
Identifiable assets 7,292,000 5,719,000 13,011,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 2,801,000 $ 1,106,000 $ 3,907,000
Operating loss (865,000) (672,000) $(1,848,000) (3,385,000)
Identifiable assets 6,600,000 6,600,000
<CAPTION>
Six months ended June 30, 1998
------------------------------------------------------------------------------------
United Corporate
States Europe Research & Development Consolidated
------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 4,145,000 $ 2,390,000 $ 6,535,000
Operating loss (945,000) (331,000) $(2,877,000) (4,153,000)
Identifiable assets 7,292,000 5,719,000 13,011,000
</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
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 1998.
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, 1999 were
$1,522,000 and $3,907,000, respectively, as compared to $3,534,000 and
$6,535,000 for the three and six months ended June 30, 1998.
For the three months ended June 30, 1999 revenues consisted of $382,000
(25%) in software licenses and $1,140,000 (75%) related to services and other
revenue. This compares to software license revenues of $1,169,000 (33%) and
services and other revenue of $2,365,000 (67%) for the three months ended June
30, 1998. For the six months ended June 30, 1999 revenues consisted of
$1,154,000 (30%) in software licenses and $2,753,000 (70%) related to services
and other revenues. This compares to $2,060,000 (32%) in software licenses and
$4,475,000 (68%) related to services and other revenue for the six months ended
June 30 1998.
For the three and six months ended June 30, 1999, software licenses
revenues decreased $787,000 and $906,000, respectively, while revenues generated
from services decreased $1,225,000 and $1,722,000, respectively. This reduction
is attributable in part to the consummation of the Spescom transaction. As of
April 1, 1999, operations of ASL have been excluded from the consolidated
results as a result of the Spescom transaction. See Note 3 of the Condensed
Notes to the Consolidated Financial Statements. Additionally, management
believes that the Company's inability to provide the Altris EB product as
originally planned in 1997, which was to address the needs of new customers for
additional features and functionality, coupled with customers' uncertainty
regarding the financial condition of the Company, was the principal cause for
the decline in software licenses, services and other revenues. 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. Management believes that these expenditures have reduced funds
available to purchase software products such as those offered by the Company.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue, although no customer accounted for
more than 10% of total revenue for the three and six months ended June 30, 1999
or 1998. One consequence of this dependence has been that revenue can fluctuate
significantly on a quarterly basis. The Company's reliance on relatively few
customers could have a material adverse effect on the results of its operations
on a quarterly basis. Additionally, a significant portion of the Company's
revenues has historically been derived from the sale of systems to new
customers.
Cost of Revenues
Cost of license revenues consists of costs associated with reselling
third-party software products and amortization of internal software development
costs. Gross profit as a percentage of license revenues was 25% and 49% for the
three and six months ended June 30, 1999 compared to 75% and 71% for the three
and six months ended June 30, 1998. The decrease in the gross profit margin from
licenses was due principally to increased amortization of software development
costs in 1999 compared to 1998, due to the Company's release of its EB product,
and the decreased 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 as a percentage of services and other
revenue was 35% and
12
<PAGE>
33%, respectively, for the three and six months ended June 30, 1999 compared to
24% and 26%, respectively for the three and six months ended June 30, 1998. 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, 1999 was $837,000 and $1,848,000, respectively, as compared to $608,000
and $1,351,000 for the same periods in the prior year. Research and development
expense can vary year to year based on the amount of engineering service
contract work required for customers versus purely internal development
projects. It may also vary based on internal development projects in which
technological feasibility and marketability of a product are established. These
costs are capitalized as incurred and then amortized when the product is
available for general release to customers. The increase in research and
development for the three and six months ended June 30, 1999 was due primarily
to the fact that prior to release of the Company's EB product in 1999, the
associated development costs were capitalized, whereas development costs in 1999
have been expensed. This increase in development expense was offset partially by
a reduction in personnel costs.
Marketing and sales expense for the three and six months ended June 30,
1999 was $397,000 and $1,162,000, respectively, as compared to $1,066,000 and
$2,735,000 for the three and six months ended June 30, 1998. The decrease is
primarily due to lower personnel and associated costs. In addition, as a result
of the delay in releasing Altris EB, the Company reduced marketing and
promotional costs in the first half of 1999 compared to the same period a year
ago. Additionally, as of April 1, 1999, marketing and sales expense does not
include ASL's expenses.
General and administrative expense was $443,000 and $1,890,000,
respectively, for the three and six months ended June 30, 1999 as compared to
$1,303,000 and $2,713,000 for the three and six months ended June 30, 1998. The
decrease in general and administrative expense was due to decreased legal and
accounting fees for the three and six months ended June 30, 1999. Additionally,
the Company received $222,000 from its insurance carrier for legal fees incurred
in connection with shareholder suits. In 1998, general and administrative costs
included increased legal, accounting and consulting costs associated with the
Company's restatement of its financial statements for fiscal year 1996 and the
three interim quarters in 1997. Also, as of April 1, 1999, general and
administrative expense does not include ASL's expenses.
Interest and other income was $186,000 and $195,000 for the three and
six months ended June 30, 1999 as compared to $3,000 and $18,000 for the same
period a year ago. The increase is primarily due to a gain recorded on the
Spescom transaction in the second quarter 1999. See Note 3 of the Condensed
Notes to the Consolidated Financial Statements.
Interest and other expense was $149,000 and $312,000, respectively, for
the three and six months ended June 30, 1998 versus $169,000 and $332,000 for
the three and six months ended June 30, 1998. The decrease was due to a lower
debt balance at June 30, 1999 versus the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's cash and cash equivalents totaled
$422,000 as compared to $530,000 at December 31, 1998, and its current ratio was
.2 to 1. The Company has two revolving credit facilities. At June 30, 1999,
$636,000 was outstanding on the revolving loan agreements with no additional
funds available on the facility. See Note 6 of the Condensed Notes to the
Consolidated Financial Statements.
As a result of misapplications in its revenue recognition policies, the
Company, in 1998, restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. The restatement triggered events of
default under each of the Company's revolving loan agreements and under the
Subordinated Debenture. The lenders under such agreements and the Subordinated
Debenture agreed to waive such events of default. The lender under the
13
<PAGE>
revolving loan agreement ("the Lender") has also waived compliance with
certain financial covenants 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 revolving loan agreements 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. There can be no assurances that
the Company will be able to secure from its lenders a further waiver of such
default or any other events of default, including any events of default
occurring after March 15, 2000 under the financial covenants of the revolving
loan agreements. If such events of default are not waived, the Company may be
required to repay the full amount of its outstanding indebtedness under the
revolving credit agreements. The Company's existing payment default and any
future defaults in the payment of such indebtedness or in the performance of
other covenants under the agreements related to such indebtedness, whether
occurring prior to or after March 15, 2000, could also result in the Company
being required to repay the full amount of such indebtedness. The repayment
of such indebtedness would require additional debt or equity financing. There
can be no assurances that any such financing would be available.
At June 30, 1999, cash used in operating and financing activities
totaled $1,845,000 and $192,000, respectively, while cash provided by investing
activities totaled $1,919,000. Cash provided by investing activities was
generated from the sale of a 60% interest in ASL to Spescom. For the six months
ended June 30, 1998, cash provided by financing activities totaled $659,000
while cash used in operating and investing activities totaled $640,000 and
$1,237,000, respectively. Cash provided by financing activities was from net
borrowings under revolving loan and bank agreements.
In the first half 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 systems sales of Altris EB in the near term, which cannot
be assured. Given the substantial uncertainties confronting the Company, there
can be no assurances 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 other means will be necessary to enable the Company to meet its short
term needs for working capital. There can be no assurances 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 effect
on the Company's business, results of operations, and financial condition and
could impact the Company's ability to continue as a going concern.
Net Operating Loss Tax Carryforwards
As of December 31, 1998, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $42,000,000
and $9,429,000, respectively which expires 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,
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.
14
<PAGE>
Over the past five years, the Company has issued equity securities in
connection with the Spescom transaction, the private placement in June 1997, the
Trimco acquisition in December 1995 and through traditional stock option grants
to employees. Although there was no "ownership change" to date, this activity
increases the potential for an "ownership change" for income tax purposes.
In connection with the acquisition of Optigraphics, the Company
acquired Optigraphics' net operating losses which are limited to offset against
that entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Uncertain Impact of Restatement of Financial Statements
As a result of the misapplications in its revenue recognition policies,
the Company in 1998 restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. In connection with the misapplications,
conditions which collectively represented material weaknesses in the Company's
internal accounting controls were identified. These conditions included a lack
of (i) sufficient oversight by the Company in regard to revenue recognition
practices of the Company's U.K. subsidiary, (ii) adherence to existing internal
controls and (iii) an adequate internal control structure in the Company's U.K.
subsidiary.
To address the material weaknesses represented by these conditions, the
Company adopted a plan to strengthen the Company's internal accounting controls.
This plan included updating the Company's revenue recognition policies regarding
accounting and reporting for its customer contracts and contracts with Value
Added Resellers (VARs). The Company has implemented these policies.
The report of the Company's independent accountants, Grant Thornton LLP, on the
Company's Consolidated Financial Statements as of and for the year ended
December 31, 1998 includes an explanatory paragraph regarding the Company's
ability to continue as a going concern. See "Report of Independent Certified
Public Accountants" accompanying the Consolidated Financial Statements. The
Company's restatement of its financial statements, de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to meet certain listing requirements, corporate actions to restructure
operations and reduce operating expenses, and customer uncertainty regarding the
Company's financial condition have had, and are likely to have in the future, a
material adverse effect on the Company and its ability to sell its products in
future.
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. In the six months ended June 30,
1999, revenue from the United States, Europe and other locations in the world
were 78%, 19% and 3%, respectively. This compares to 60%, 35% and 5%,
respectively for the same period in 1998. The European currencies have been
relatively stable against the U.S. dollar for the past several years. As a
result, foreign currency fluctuations have not had a significant impact on the
Company's revenues or results of operations. The Company has recently increased
its sales efforts in international markets outside Europe, including Asia and
Latin America, whose currencies have tended to fluctuate more relative to the
U.S. dollar. In addition, the current continued weakness in Asian currencies may
result in reduced revenues from the countries affected by this condition.
Changes in foreign currency rates, the condition of local economies, and the
general volatility of software markets may result in higher or lower proportion
of foreign revenues in the future. Although the Company's operating and pricing
strategies take into account changes in exchange rates over time, there can be
no assurance that future fluctuations in the value of foreign currencies will
not have a material adverse effect on the Company's business, operating results
and financial condition.
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.
15
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' computer systems and/or
software may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has commenced a program, to be substantially completed by
the Fall of 1999, to review the Year 2000 compliance status of the software and
systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. Implementation of software
products from third parties, however, will require the dedication of
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999 as a part of
the Company Year 2000 compliance program. The Company is in the process of
completing Year 2000 compliance reviews and upgrades to software or systems
which are deemed critical to the Company's business. The Company expects to
complete this by September 1999. Nevertheless, particularly to the extent the
Company is relying on the products of other vendors to resolve Year 2000 issues,
there can be no assurances that the Company will not experience delays in
implementing such products. If key systems, or a significant number of systems
were to fail as a result of Year 2000 problems or the Company were to experience
delays implementing Year 2000 compliant software products, the Company could
incur substantial costs and disruption of its business, which would potentially
have a material adverse effect on the Company's business and results of
operations.
The Company, in its ordinary course of business, tests and evaluates
its own software products. The Company 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. However, some of the Company's customers are running product versions that
are not Year 2000 compliant. The Company has been encouraging these customers to
migrate to current product versions. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with Year 2000 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 a growing number 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company. 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Form 8-K, dated June 1, 1999
(b) Form 8-K/A, dated July 2, 1999
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTRIS SOFTWARE, INC.
By: /s/John W. Low
------------------------------------
John W. Low
Chief Financial Officer
Dated: August 12, 1999
---------------------------------
18
<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 September 30, 1999
[ ] 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 November 1, 1999: 11,628,163
-------------
<PAGE>
ALTRIS SOFTWARE, INC.
---------------------
INDEX
-----
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
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 12
PART II. OTHER INFORMATION 18
</TABLE>
2
<PAGE>
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
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 Cumulative 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 shareholder's deficit (9,634,000) (6,778,000)
---------- ------------
Total liabilities and shareholders' deficit $ 5,748,000 $ 11,366,000
----------- ------------
----------- ------------
</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 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 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 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
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
-------------- --------------
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 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 - 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 ended 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 31, 1999.
NOTE 3 - SPESCOM TRANSACTION
In May 1999, the Company completed a transaction with Spescom Ltd., a
South African company publicly traded on the Johannesburg Exchange, whereby
Spescom invested $1.8 million for 2 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
6
<PAGE>
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
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.
7
<PAGE>
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.
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
(pound)100,000 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.
8
<PAGE>
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
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.
9
<PAGE>
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)
------------ ------------ ------------- ------------
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 1,051000 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>
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>
10
<PAGE>
<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
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
11
<PAGE>
routine litigation, individually or in the aggregate, is not likely to be
material to the Company's consolidated financial position or results of
operations.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998.
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 nine months ended September 30, 1999 were
$1,559,000 and $5,466,000, respectively, as compared to $3,149,000 and
$9,684,000 for the three and nine months ended September 30, 1998.
For the three months ended September 30, 1999 revenues consisted of
$479,000 (31%) in software licenses and $1,080,000 (69%) related to services and
other revenue. This compares to software license revenues of $770,000 (24%) and
services and other revenue of $2,379,000 (76%) for the three months ended
September 30, 1998. For the nine months ended September 30, 1999 revenues
consisted of $1,633,000 (30%) in software licenses and $3,833,000 (70%) related
to services and other revenues. This compares to $3,313,000 (34%) in software
licenses and $6,371,000 (66%) related to services and other revenue for the nine
months ended September 30,1998.
For the three and nine months ended September 30, 1999, software
licenses revenues decreased from the comparable period in the year prior by
$291,000 and $1,680,000, respectively, while revenues generated from services
decreased by $1,299,000 and by $2,538,000, respectively. This reduction is
attributable in part to the consummation of the Spescom transaction. As of April
1, 1999, operations of ASL have been excluded from the consolidated results as a
result of the Spescom transaction (see Note 3 of the Condensed Notes to the
Consolidated Financial Statements). Additionally, management believes that the
Company's inability to provide the Altris EB product as originally planned in
1997, which was to address the needs of new customers for additional features
and functionality, coupled with customers' uncertainty regarding the financial
condition of the Company, was the principal cause for the decline in software
licenses, services and other revenues. 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. Management
believes that these expenditures have reduced funds available to purchase
software products such as those offered by the Company.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue, although no customer accounted for
more than 10% of total revenue for the three and nine months ended September 30,
1999 or 1998. One consequence of this dependence has been that revenue can
fluctuate significantly on a quarterly basis. The Company's reliance on
relatively few customers could have a material adverse effect on the results of
its operations on a quarterly basis. Additionally, a significant portion of the
Company's revenues has historically been derived from the sale of systems to new
customers.
Cost of Revenues
Cost of license revenues consists of costs associated with reselling
third-party software products and amortization of internal software development
costs. Gross profit as a percentage of license revenues was 39% and 46% for
the three and nine months ended September 30, 1999 compared to 69% and 75% for
the three and nine months ended September 30, 1998. The decrease in the gross
profit margin from licenses was due principally to increased amortization of
software development costs in 1999 compared to 1998, due to the Company's
release of its EB product in 1999, while revenues decreased.
13
<PAGE>
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 as a percentage of
services and other revenue was 38% and 36%, respectively, for the three and
nine months ended September 30, 1999 compared to 41% and 26%, respectively
for the three and nine months ended September 30, 1998. The decrease in gross
profit as a percentage of services and other revenues for the comparable
three months ended September 30 is due to the Company having recording an
additional reserve to reduce the carrying amount of inventory to its
estimated net realizable value. For the comparable nine months, 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 nine months ended
September 30, 1999 was $773,000 and $2,621,000, respectively, as compared to
$552,000 and $1,779,000 for the same periods in the prior year. Research and
development expense can vary year to year based on the amount of engineering
service contract work required for customers versus purely internal development
projects. It may also vary based on internal development projects in which
technological feasibility and marketability of a product are established. These
costs are capitalized as incurred and then amortized when the product is
available for general release to customers. The increase in research and
development for the three and nine months ended September 30, 1999 was due
primarily to the fact that prior to release of the Company's EB product in 1999,
the associated development costs were capitalized, whereas development costs in
1999 have been expensed. This increase in development expense was offset
partially by a reduction in personnel costs.
Marketing and sales expense for the three and nine months ended
September 30, 1999 was $343,000 and $1,505,000, respectively, as compared to
$887,000 and $3,542,000 for the three and nine months ended September 30,
1998. The decrease is primarily due to lower personnel and associated costs.
In addition, as a result of the delay in releasing Altris EB, the Company
reduced marketing and promotional costs in the first half of 1999 compared to
the same period a year ago. Additionally, commencing as of April 1, 1999,
marketing and sales expense has not included ASL's expenses.
General and administrative expense was $280,000 and $2,169,000,
respectively, for the three and nine months ended September 30, 1999 as
compared to $890,000 and $3,807,000 for the three and nine months ended
September 30, 1998. The decrease in the general and administrative expense in
the third quarter of 1999, is due to the Company recorded a credit of
$157,000 for the release of any claim for unpaid compensation to the
Company's former President and CEO and the surrender of his 35,000 shares of
common stock in the Company. The decrease also was due to decreased legal and
accounting fees for the three and nine months ended September 30, 1999.
Additionally, the Company received $222,000 from its insurance carrier for
legal fees incurred in connection with shareholder suits which was recognized
in the second quarter of 1999. In 1998, general and administrative costs
included higher legal, accounting and consulting costs associated with the
Company's restatement of its financial statements for fiscal year 1996 and
the three interim quarters in 1997. Also, commencing as of April 1, 1999,
general and administrative expense has not included ASL's expenses.
Interest and other income was $1,000 and $195,000 for the three and nine
months ended September 30, 1999 as compared to $5,000 and $23,000 for the same
period a year ago. The increase in the nine months total is primarily due to a
gain recorded on the Spescom transaction in the second quarter 1999 (see Note 3
of the Condensed Notes to the Consolidated Financial Statements).
Interest and other expense was $148,000 and $460,000, respectively, for
the three and nine months ended September 30, 1998 versus $160,000 and $492,000
for the three and nine months ended September 30, 1998. The decrease was due to
a lower debt balance at September 30, 1999 versus the same period in 1998.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's cash and cash equivalents
totaled $246,000 as compared to $530,000 at December 31, 1998, and its
current ratio was .13 to 1. The Company has two revolving credit facilities.
At September 30, 1999, $502,000 was outstanding on the revolving loan
agreements with no additional funds available under the facilities (see Note
6 of the Condensed Notes to the Consolidated Financial Statements).
As a result of misapplications in its revenue recognition policies,
the Company, in 1998, restated its previously presented interim financial
information and annual financial statements for 1996 and the interim
information for the first three quarters of 1997. The restatement triggered
events of default under each of the Company's revolving loan agreements and
under the Subordinated Debenture issued to the investor. The lenders under
such agreements and the Subordinated Debenture agreed to waive such events of
default. The lender under the revolving loan agreements ("the Lender") has
also waived compliance with certain financial covenants 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
revolving loan agreements 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.
There can be no assurances that the Company will be able to secure from its
lenders a further waiver of such default or any other events of default,
including any events of default occurring after March 15, 2000 under the
financial covenants of the revolving loan agreements. If such events of
default are not waived, the Company may be required to repay the full amount
of its outstanding indebtedness under the revolving credit agreements. The
Company's existing payment default and any future defaults in the payment of
such indebtedness or in the performance of other covenants under the
agreements related to such indebtedness, whether occurring prior to or after
March 15, 2000, could also result in the Company being required to repay the
full amount of such indebtedness. The repayment of such indebtedness would
require additional debt or equity financing. There can be no assurances that
any such financing would be available.
At September 30, 1999, cash used in operating activities totaled
$2,188,000, respectively, while cash provided by investing and financing
activities totaled $118,000 and $1,776,000, respectively. Cash provided by
financing activities was generated from the sale of common stock to Spescom.
For the nine months ended September 30, 1998, cash provided by operating and
financing activities totaled $1,688,000 and $467,000, respectively, while
cash used in investing activities totaled $1,928,000.
In September 1999, Altris 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. The first $300,000 of this loan was received in September 1999 and the
remaining $200,000 was received in October 1999.
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 systems sales of Altris EB in the near term, which cannot
be assured. Given the substantial uncertainties confronting the Company, there
can be no assurances that sufficient cash flows will be generated by the Company
in the near term to meet its current obligations. Accordingly, the Company is
continuing to investigate raising additional cash through a debt or equity
offering or other means. Management believes that such additional cash through
the issuance of debt or other means will be necessary to enable the Company to
meet its short term needs for working capital. There can be no assurances 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 effect on the Company's business, results of operations, and
financial condition and could impact the Company's ability to continue as a
going concern.
Net Operating Loss Tax Carryforwards
As of December 31, 1998, the Company had a net operating loss
carryforward ("NOL") for federal and state income tax purposes of $42,000,000
and $9,429,000, respectively which expires 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
15
<PAGE>
would be entitled to reduce its future Federal income tax liabilities by
carrying unused NOL forward for a period of 15 years to offset future taxable
income earned, and by carrying unused tax credits forward for a period of 15
years to offset future income taxes. However, the Company's ability to utilize
any NOL and credit carryforwards in future years may be restricted in the event
the Company undergoes an "ownership change," generally defined as a more than 50
percentage point change of ownership by one or more statutorily defined
"5-percent stockholders" of a corporation, as a result of future issuances or
transfers of equity securities of the Company within a three-year testing
period. In the event of an ownership change, the amount of NOL attributable to
the period prior to the ownership change that may be used to offset taxable
income in any year thereafter generally may not exceed the fair market value of
the Company immediately before the ownership change (subject to certain
adjustments) multiplied by the applicable long-term, tax-exempt rate announced
by the Internal Revenue Service in effect for the date of the ownership change.
A further limitation would apply to restrict the amount of credit carryforwards
that might be used in any year after the ownership change. As a result of these
limitations, in the event of an ownership change, the Company's ability to use
its NOL and credit carryforwards in future years may be delayed and, to the
extent the carryforward amounts cannot be fully utilized under these limitations
within the carryforward periods, these carryforwards will be lost. Accordingly,
the Company may be required to pay more Federal income taxes or to pay such
taxes sooner than if the use of its NOL and credit carryforwards were not
restricted.
Over the past five years, the Company has issued equity securities in
connection with the Spescom transaction, the private placement in June 1997, the
Trimco acquisition in December 1995 and through traditional stock option grants
to employees. Although there was no "ownership change" to date, this activity
increases the potential for an "ownership change" for income tax purposes.
In connection with the acquisition of Optigraphics, the Company acquired
Optigraphics' net operating losses which are limited to offset against that
entity's future taxable income, subject to annual limitations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Uncertain Impact of Restatement of Financial Statements
As a result of the misapplications in its revenue recognition policies,
the Company in 1998 restated its previously presented interim financial
information and annual financial statements for 1996 and the interim information
for the first three quarters of 1997. In connection with the misapplications,
conditions which collectively represented material weaknesses in the Company's
internal accounting controls were identified. These conditions included a lack
of (i) sufficient oversight by the Company in regard to revenue recognition
practices of the Company's U.K. subsidiary, (ii) adherence to existing internal
controls and (iii) an adequate internal control structure in the Company's U.K.
subsidiary.
To address the material weaknesses represented by these conditions, the
Company adopted a plan to strengthen the Company's internal accounting controls.
This plan included updating the Company's revenue recognition policies regarding
accounting and reporting for its customer contracts and contracts with Value
Added Resellers (VARs). The Company has implemented these policies.
The report of the Company's independent accountants, Grant Thornton LLP,
on the Company's Consolidated Financial Statements as of and for the year ended
December 31, 1998 includes an explanatory paragraph regarding the Company's
ability to continue as a going concern. See "Report of Independent Certified
Public Accountants" accompanying the Consolidated Financial Statements. The
Company's restatement of its financial statements, de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to meet certain listing requirements, corporate actions to restructure
operations and reduce operating expenses, and customer uncertainty regarding the
Company's financial condition have had, and are likely to have in the future, a
material adverse effect on the Company and its ability to sell its products in
future.
Foreign Currency
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. For the nine months ended
September 30, 1999, revenue from the United States, Europe and other locations
in the world were 82%, 15% and 4%, respectively. This compares to 61%, 36% and
3%, respectively for the same period in 1998. The European currencies have been
relatively stable against the U.S. dollar for the past several years. As a
result, foreign currency fluctuations have not had a significant impact on the
Company's revenues or results of operations. The Company has recently increased
its sales efforts in
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international markets outside Europe, including Asia and Latin America, whose
currencies have tended to fluctuate more relative to the U.S. dollar. In
addition, the current continued weakness in Asian currencies may result in
reduced revenues from the countries affected by this condition. Changes in
foreign currency rates, the condition of local economies, and the general
volatility of software markets may result in higher or lower proportion of
foreign revenues in the future. Although the Company's operating and pricing
strategies take into account changes in exchange rates over time, there can be
no assurance that future fluctuations in the value of foreign currencies will
not have a material adverse effect on the Company's business, operating results
and financial condition.
Inflation
The Company believes that inflation has not had a material effect on its
operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' computer systems and/or
software may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has implemented 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.
Implementation of software products from third parties, however, will require
the dedication of administrative and management information resources, the
assistance of consulting personnel from third party software vendors and the
training of the Company's personnel using such systems. Based on the information
available to date, the Company believes it will be able to complete its Year
2000 compliance review and make necessary modifications prior to the end of 1999
as a part of the Company Year 2000 compliance program. Nevertheless,
particularly to the extent the Company is relying on the products of other
vendors to resolve Year 2000 issues, there can be no assurances that the Company
will not experience delays in implementing such products. If key systems, or a
significant number of systems were to fail as a result of Year 2000 problems or
the Company were to experience delays implementing Year 2000 compliant software
products, the Company could incur substantial costs and disruption of its
business, which would potentially have a material adverse effect on the
Company's business and results of operations.
The Company, in its ordinary course of business, tests and evaluates its
own software products. The Company 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. However, some of the Company's customers are running product versions that
are not Year 2000 compliant. The Company has been encouraging these customers to
migrate to current product versions. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with Year 2000 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 a growing number of
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lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain to what extent the Company may be affected by
it.
In addition, management believes that future purchasing patterns of
customers and potential customers have been affected by Year 2000 issues, with
many companies expending significant resources to correct their software systems
for Year 2000 compliance. These expenditures have reduced funds available to
purchase software products such as those offered by the Company.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 30, 1999, the United States District Court for the Southern
District of California approved the settlement of certain securities class
action lawsuits against the Company. 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held October 28, 1999. 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
20,000,000 to 30,000,000 shares. The proposal was approved with 7,697,313
proxies voting for, 359,532 voting against, and 40,635 abstaining. The
shareholders also approved a proposal to amend the Company's 1996 Stock
Incentive Plan to increase the aggregate number of shares of Common Stock
reserved for issuance from 925,000 to 1,425,000 shares. The proposal was
approved with 7,604,463 proxies voting for, 443,467 voting against, and 49,550
abstaining.
In addition, at the meeting, the shareholders approved the election of
the following individuals as directors who will hold office until the next
annual meeting: Roger H. Erickson, Martin P. Atkinson, D. Ross Hamilton, Michael
J. McGovern and Larry D. Unruh.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Form 8-K/A, dated July 2, 1999
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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
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John W. Low
Chief Financial Officer
Dated: November 12, 1999
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