-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lt1/PHLHhou+4R91lDcXF5YGlqkJ2glOr1bMr3jKc2jxwfWDXzy+eCvuo8H8x4UE +GSDDGID8Qv87GgJ/IyNLQ== 0001047469-98-041312.txt : 19981118 0001047469-98-041312.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041312 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTRIS SOFTWARE INC CENTRAL INDEX KEY: 0000813747 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 953634089 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15935 FILM NUMBER: 98752176 BUSINESS ADDRESS: STREET 1: 9339 CARROLL PARK DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196253000 MAIL ADDRESS: STREET 1: ALPHAREL INC /CA/ STREET 2: 9339 CARROLL PARK DR CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: ALPHAREL INC /CA/ DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-15935 ALTRIS SOFTWARE, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-3634089 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121 ----------------------------------------------------- (Address of principal executive offices and zip code) (619) 625-3000 -------------------------------------------------- (Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of Common Stock outstanding at October 31, 1998: 9,614,663 -------------- Number of Sequentially Numbered Pages: 18 Exhibit Index at Page 18 ALTRIS SOFTWARE, INC. INDEX
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet 3 Consolidated Statement of Operations 4 Consolidated Statement of Cash Flows 5 Notes to the Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 16
2 ALTRIS SOFTWARE, INC. CONSOLIDATED BALANCE SHEET
September 30, 1998 December 31, 1997 ------------------ ----------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,058,000 $ 1,938,000 Short term investments - 133,000 Receivables, net 1,448,000 3,045,000 Inventory, net 316,000 460,000 Other current assets 294,000 633,000 ----------- ----------- Total current assets 4,116,000 6,209,000 Property and equipment, net 1,728,000 2,270,000 Computer software, net 4,670,000 3,042,000 Goodwill, net 3,306,000 3,914,000 Other assets 314,000 401,000 ----------- ----------- $14,134,000 $15,836,000 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,961,000 $ 2,928,000 Accrued liabilities 2,231,000 2,758,000 Notes payable 825,000 730,000 Deferred revenue 3,255,000 1,770,000 ----------- ----------- Total current liabilities 9,272,000 8,186,000 Long term notes payable 733,000 274,000 Deferred revenue, long term portion 2,368,000 -- Other long term liabilities 113,000 173,000 Subordinated debt, net of discount 2,561,000 2,473,000 ----------- ----------- Total liabilities 15,047,000 11,106,000 ----------- ----------- Commitments: Mandatorily redeemable convertible preferred stock, $1,000 par value, 3,000 shares authorized; 3,000 shares issued and outstanding ($2,898,000 and $2,682,000 total liquidation preference, respectively) 2,898,000 2,682,000 Shareholders' equity: Common stock, no par value, 20,000,000 shares authorized; 9,614,663 and 9,614,663 issued and outstanding, respectively 61,297,000 61,600,000 Common stock warrants 585,000 585,000 Foreign currency translation adjustment (82,000) 25,000 Accumulated deficit (65,611,000) (60,162,000) ----------- ----------- Total shareholders' equity (3,811,000) 2 ,048,000 ----------- ----------- $14,134,000 $15,836,000 ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements. 3 ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the three months For the nine months ended September 30, ended September 30 --------------------------------- ---------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $3,149,000 $ 5,041,000 $ 9,684,000 $13,780,000 Cost of revenues 1,647,000 2,097,000 5,536,000 7,042,000 ---------- ----------- ----------- ----------- Gross profit 1,502,000 2,944,000 4,148,000 6,738,000 ---------- ----------- ----------- ----------- Operating expenses: Research and development 552,000 1,095,000 1,779,000 3,041,000 Marketing and sales 887,000 2,310,000 3,542,000 5,990,000 General and administrative 805,000 951,000 3,197,000 2,656,000 Restructuring expense 85,000 - 610,000 - Write-off of certain offering costs - - - 270,000 ---------- ----------- ----------- ----------- Total operating expenses 2,329,000 4,356,000 9,128,000 11,957,000 ---------- ----------- ----------- ----------- Loss from operations (827,000) (1,412,000) (4,980,000) (5,219,000) Interest and other income 5,000 41,000 23,000 93,000 Interest and other expense (160,000) (159,000) (492,000) (268,000) ---------- ----------- ----------- ----------- Loss before income taxes (982,000) (1,530,000) (5,449,000) (5,394,000) Provision for income taxes - - - - ---------- ----------- ----------- ----------- Net loss $ (982,000) $(1,530,000) $(5,449,000) $(5,394,000) ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- Basic net loss per common share $ (.11) $ (.17) $ (.60) $ (.57) ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- Diluted net loss per common share $ (.11) $ (.17) $ (.60) $ (.57) ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- Shares used in computing basic and diluted net loss per common share 9,615,000 9,587,000 9,615,000 9,575,000
See accompanying notes to the consolidated financial statements 4 ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For the nine months ended September 30, ---------------------------------- 1998 1997 ---- ---- Cash flow from operating activities: Net loss $(5,449,000) $(5,394,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,712,000 1,754,000 Loss on disposal of assets 46,000 - Changes in assets and liabilities: Receivables, net 1,597,000 1,121,000 Inventory 144,000 43,000 Other assets 339,000 208,000 Accounts payable 33,000 414,000 Accrued liabilities (527,000) (800,000) Deferred revenue 3,853,000 433,000 Other long term liabilities (60,000) (558,000) ----------- ----------- Net cash provided by (used in) operating activities 1,688,000 (2,779,000) ----------- ----------- Cash flows from investing activities: Sale or maturity of short term investments 133,000 153,000 Purchases of short term investments - (1,499,000) Purchases of property and equipment (99,000) (579,000) Purchases of software (158,000) (41,000) Computer software capitalized (1,804,000) (1,146,000) ----------- ----------- Net cash used in investing activities (1,928,000) (3,112,000) ----------- ----------- Cash flows from financing activities: Repayments under notes payable (233,000) (2,243,000) Net borrowings under revolving loan and bank agreements 787,000 1,121,000 Payment of preferred stock dividends (87,000) (61,000) Net proceeds from issuance of preferred stock - 2,653,000 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 - 186,000 ----------- ----------- Net cash provided by financing activities 467,000 4,309,000 ----------- ----------- Effect of exchange rate changes on cash (107,000) 70,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 120,000 (1,512,000) Cash and cash equivalents at beginning of period 1,938,000 2,200,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,058,000 $ 688,000 ----------- ----------- ----------- ----------- Supplemental cash flow information: Interest paid $ 353,000 $ 189,000 ----------- ----------- ----------- ----------- Schedule of noncash financing activities: Accretion of dividends on mandatorily redeemable convertible preferred stock $ 216,000 $ 29,000 ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements. 5 ALTRIS SOFTWARE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated balance sheet of Altris Software, Inc. (the "Company") as of September 30, 1998 and the consolidated statement of operations and of cash flows for the three and nine month periods ended September 30, 1998 and 1997 are unaudited. The consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles applicable to interim periods. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The results for the three and six months ended June 30, 1998, as previously reported, included $124,000 in research and development expense and $80,000 in marketing and sales expense that has since been reclassified as general and administrative expense. The results for the nine months ended September 30, 1998 have been adjusted to reflect this reclassification of expenses. NOTE 2 - NET INCOME PER SHARE The Company adopted Statement of Financial Accounting Standard No. 128 ("FAS 128"), "Earnings per Share," for fiscal 1997 and retroactively restated all prior periods to conform with FAS 128 as required. Basic net income per common share is computed as net income less accretion of dividends on mandatorily redeemable convertible preferred stock divided by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed as net income divided by the weighted average number of common shares and potential common shares, using the treasury stock method, outstanding during the period and assumes conversion into common stock at the beginning of each period of all outstanding shares of convertible preferred stock. Computations of basic and diluted earnings per share do not give effect to individual potential common stock instruments for any period in which their inclusion would be anti-dilutive. NOTE 3 - SALE OF RIPS AND LICENSE OF CERTAIN OTHER SOFTWARE On September 21, 1998 the Company entered into an agreement with Structural Dynamics Research Corporation ("SDRC") to sell its Rapid Information Presentation Services ("RIPS") product including source code and to license certain other software including portions of the Company's document management products, Enabler and EB-TM-. Under the agreement SDRC has a royalty free, fully paid right to sublicense these portions of Enabler and EB when sold with SDRC's Metaphase document management product. The total consideration was $3,125,000 less $750,000 that had been paid to Altris by SDRC under a Marketing Services and Integration Agreement ("Marketing Agreement") dated December 31, 1997. Under the Marketing Agreement the Company had recognized revenue of $363,000 in 1998. Upon closing, the Marketing Agreement was terminated. In regard to the sale of RIPS and sublicense of Enabler and EB along with future versions or successors thereof, the Company has deferred recognition of $2,763,000 in revenue. The revenue is expected to be recognized over the estimated economic life of the products to SDRC. 6 NOTE 4 - RECEIVABLES
September 30, 1998 December 31, 1997 ------------------ ----------------- Billed receivables $ 1,418,000 $ 3,111,000 Unbilled receivables 231,000 219,000 Less allowance for doubtful accounts (201,000) (285,000) ----------- ----------- $ 1,448,000 $ 3,045,000 ----------- ----------- ----------- -----------
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, 1998 and December 31, 1997, the Company's reserve against excess quantities totaled $601,000 and $511,000, respectively. NOTE 6 - NOTES PAYABLE AND SUBORDINATED DEBT The Company's United Kingdom subsidiary has an overdraft facility with a bank with interest calculated at 2.0% per annum over the bank's base rate (9.5% at September 30, 1998 and 9.25% at December 31, 1997). The facility is for $425,000 (L250,000) and is payable on demand. At September 30, 1998 and December 31, 1997, $425,000 and $430,000, respectively, was outstanding. The property and assets of the Company's United Kingdom subsidiary secure repayment of the borrowings under the facility. The Company has executed a guarantee in connection with the facility. In October 1998, the Company and the bank agreed to extend the facility through January 15, 1999 for $425,000 (L250,000) at 3% per annum over the bank's base rate. In September 1997, the Company issued a five-year, 11.5% subordinated debenture ("the Subordinated Debenture") with quarterly interest payments for gross proceeds of $3,000,000. In conjunction with the debt, the Company granted warrants to purchase 300,000 shares of the Company's common stock at an exercise price of $6.00 per share which are exercisable over a five year period from the date of issuance. The warrants were valued at $585,000 and a portion of the proceeds from the debt has been allocated to common stock warrants. In September 1998, the Company agreed to grant to 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 Company agreed to pay interest on a monthly rather than quarterly basis. In the event the debt is outstanding at September 2000, and each year thereafter, the Company will grant in each year, additional five year warrants to purchase 50,000 shares of common stock at an exercise price of $7.00 per share. A value has not been ascribed to these contingent warrants. At such time that the warrants are no longer contingent, a value will be ascribed, if any. As of December 31, 1997 the Company was in violation of certain covenants contained in the subordinated debenture agreement. The Company obtained a waiver of such violations in May 1998, which extends for one year from the date of the waiver. In March 1997, the Company borrowed $300,000 from an officer of the Company. The terms of the agreement were for a maximum of a three month period with a 12% per annum interest rate. The entire balance and accrued interest was paid in July 1997. The Company has two revolving loan and security agreements, each providing for borrowings of up to $1,000,000. The maximum credit available under each facility declines by $200,000 each year in March and September beginning in 1997 and 1996, respectively. Each loan is payable in monthly installments of $16,667. At September 30, 1998, $1,133,000 was outstanding with no additional funds available on the facility. At December 31, 1997, $574,000 was outstanding and $793,000 was unused on these facilities. Total borrowings under the revolving loan and security agreements are collateralized by the Company's assets and interest is equal to the 30-day Commercial Paper Rate plus 2.95% (8.46% and 8.80% at September 30, 1998 and 7 December 31, 1997, respectively). The revolving loan and security agreements contain certain restrictive covenants including the maintenance of a minimum ratio of debt to tangible net worth. As of December 31, 1997 the Company was in violation of such covenants. The Company obtained a waiver of such violations existing on and prior to December 31, 1997. In addition, the lender has also waived the debt to tangible net worth covenant through May 1999. NOTE 7 - 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 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). Commencing in March 1998 the Company has been in default of certain covenants, resulting in a dividend rate increase to 14% per annum. The Company may redeem the Series D Convertible Preferred Stock at its option after June 1999 if an average trading price for the common stock equals or exceeds $9.50 per share or after June 2002, irrespective of the trading price. The Series D Preferred Stock redemption price per share is equal to the sum of $1,000, all accrued and unpaid dividends and interest on such unpaid dividends at an annual rate of 11.5% (increased to 14% as a result of the event of default). If the number of shares issuable upon conversion of the Series D Preferred Stock, when added to all other shares of common stock issued upon conversion of the Series D Preferred Stock and any shares of common stock issued or issuable upon the exercise of the warrants would exceed 1,906,692 shares of common stock (the "Issuable Maximum"), then the Company shall be obligated to effect the conversion of only such portion of the Series D Preferred Stock resulting in the issuance of shares of 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. In the event of mandatory redemption, the redemption price per share is equal to the redemption price under the optional redemption feature, plus the appreciation in the value of the Company's common stock and conversion price on the date of redemption. In connection with the issuance of the Series D Preferred Stock, the Company has agreed to grant warrants to purchase the following number of shares of its common stock if the Series D Preferred Stock remains outstanding on each of the following dates: (i) 50,000 shares, at an exercise price of $7.00 per share, on June 27, 2000 if the Series D Preferred Stock has not been redeemed or converted in full on or prior to June 27, 2000; (ii) 50,000 shares, at an exercise price of $7.00 per share, on June 27, 2001 if the Series D Preferred Stock has not been redeemed or converted in full on or prior to June 27, 2001; (iii) 250,000 shares, at an exercise price equal to the trading price per share at the issuance of the warrant, on July 17, 2002 if the Series D Preferred Stock has not been redeemed or converted in full on or prior to July 17, 2002; and (iv) 250,000 shares, at an exercise price equal to the trading price per share at the issuance of the warrant, on June 27, 2003 if the Series D Preferred Stock has not been redeemed or converted in full on or prior to June 27, 2003. Such warrants are exercisable over a five year period from the date of grant. A value has not been ascribed to these contingent warrants. At such time that the warrants are no longer contingent, a value will be ascribed, if any. In connection with the debt (see Note 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. 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). 8 NOTE 8 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS:
For the three months For the nine months ended September 30, ended September 30, ---------------------------- ------------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net Loss Used: Net loss $ (982,000) $(1,530,000) $(5,449,000) $(5,394,000) Accretion of dividends on mandatorily redeemable convertible preferred stock (105,000) (90,000) (303,000) (90,000) ----------- ----------- ----------- ----------- Net loss used in computing basic and diluted net loss per share $(1,087,000) $(1,620,000) $(5,752,000) $(5,484,000) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares Used: Weighted average common shares outstanding used in computing basic and diluted net loss per common share 9,615,000 9,587,000 9,615,000 9,575,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NOTE 9 - LITIGATION During March 1998 through May 1998, six class action complaints alleging violations of the federal securities laws were filed against the Company. 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 the Securities Exchange Act and the California Corporations Code against the Company, certain of its present officers and directors, and Price Waterhouse LLP on behalf of persons who purchased the Company's stock between April 17, 1996 and March 11, 1998. The consolidated amended complaint alleges that the Company and the other defendants issued false and misleading statements in the Company's filings with the Securities and Exchange Commission and in other public statements. The Company's response to the consolidated amended complaint is scheduled to be filed on December 16, 1998. Management is unable to determine whether the outcome of this litigation will have a material impact on its financial position, results of operations and cash flows. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under "Certain Factors That May Affect Future Results" below and elsewhere in, or incorporated by reference into, this report. Revenues Revenues for the three and nine months ended September 30, 1998 were $3,149,000 and $9,684,000, respectively, as compared to $5,041,000 and $13,780,000 for the three and nine months ended September 30, 1997. The decrease of 38% and 30%, respectively, in revenues for the three and nine months ended September 30, 1998, is primarily due to a decline in sales of new large systems. For the three and nine months ended September 30, 1998, revenues consisted of $779,000 (25%) and $3,313,000 (34%), respectively, in new system revenues and $2,370,000 (75%) and $6,371,000 (66%), respectively, related to system enhancements, expansion and maintenance. This compares to $2,483,000 (49%) and $7,293,000 (53%), respectively, in new system revenues and $2,558,000 (51%) and $6,487,000 (47%), respectively, related to system enhancements, expansion and maintenance, for the three and nine months ended September 30, 1997. 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. The decrease in new system revenues for the three and nine months ended September 30, 1998 is the result of the Company devoting substantial sales and marketing efforts in 1997 to its anticipated Altris EB-TM- product. The availability of EB has been substantially delayed as a result of unanticipated problems in the performance of the product. Management believes that the Company's inability to provide the Altris EB product, which was to address the needs of new customers for additional features and functionality, was the principal cause for the decline in revenues for the nine months ended September 30, 1998 as compared to the same period in 1997. The Company now expects to release in late January 1999 a version of Altris EB for early shipment for integration into the operating environments of a limited number of Altris customers and partners. General distribution of the product is expected to follow later in the quarter. 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, 1998 or 1997. One consequence of this dependence has been that revenue can fluctuate significantly on a quarterly basis. The Company's reliance on relatively few customers could have a material adverse effect on the results of its operations on a quarterly basis. Additionally, a significant portion of the Company's revenues has historically been derived from the sale of systems to new customers. Cost of Revenues Gross profit as a percentage of revenues was 48% and 43% for the three and nine months ended September 30, 1998, compared to 58% and 49% for the same periods a year ago. The decrease in gross profit margin for the three and nine months ended September 30, 1998 was due primarily to a reduction in revenues which resulted in fixed costs representing a greater proportion of revenues for the three and nine months ended September 30, 1998 compared to the same period in 1997. Software license revenue was $931,000 (30%) and $2,991,000 (31%) of total revenues for the three and nine months ended September 30, 1998, compared to $2,477,000 (49%) and $6,735,000 (49%) of total revenues in the same periods in 1997. Hardware sales, which 10 have a lower margin than software, were $167,000 (5%) and $567,000 (6%) for the three and nine months ended September 30, 1998 compared to $416,000 (8%) and $1,340,000 (10%) for the same periods in 1997. Service revenues, which include maintenance, training and consulting services, were $2,051,000 (65%) and $6,126,000 (63%) for the three and nine months ended September 30, 1998 compared to $2,148,000 (43%) and $5,705,000 (41%) for the same period in 1997. The Company's software and services are sold at a significantly higher margin than third party products which are resold at a lower gross profit percentage in order for the Company to remain competitive in the marketplace for such third party products. Gross profit percentages can fluctuate quarterly based on the revenue mix of Company software, services and third party software or hardware. Operating Expenses Research and development expense for the three and nine months ended September 30, 1998 was $552,000 and $1,779,000, respectively, as compared to $1,095,000 and $3,041,000 for the same periods in the prior year. The decrease in research and development was due to a reduction in personnel. Research and development expense can vary year to year based on the amount of engineering service contract work required for customers versus purely internal development projects. It may also vary based on internal development projects in which technological feasibility and marketability of a product are established. These costs are capitalized as incurred and then amortized when the product is available for general release to customers. Technical expenses on customer-funded projects are included in cost of revenues, while expenses on internal projects are included in research and development expense. Technical expenses on customer-funded projects for the three and nine months ended September 30, 1998 were $558,000 and $2,064,000, respectively, versus $553,000 and $2,205,000, respectively, for the same period last year. Marketing and sales expense for the three and nine months ended September 30, 1998 was $887,000 and $3,542,000, respectively, as compared to $2,310,000 and $5,990,000 for the three and nine months ended September 30, 1997. The decrease is primarily attributable to a reduction in marketing and promotional costs incurred along with a reduction in personnel. General and administrative expense was $805,000 and $3,197,000, respectively, for the three and nine months ended September 30, 1998 as compared to $951,000 and $2,656,000 for the three and nine months ended September 30, 1997. The decrease in general and administrative expense for the three months ended September 30, 1998 was primarily due to a reduction in personnel, while the increase for the nine months ended September 30, 1998 was due primarily 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. During the three and nine months ended September 30, 1998, the Company incurred $85,000 and $610,000, respectively, in restructuring charges resulting primarily from severance costs including amounts owed under a Separation Agreement between the Company and its former CEO. 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. Interest and other income was $5,000 and $23,000 for the three and nine months ended September 30, 1998 as compared to $41,000 and $93,000 for the same period a year ago. The decrease is primarily due to lower cash balances. Interest and other expense was $160,000 and $492,000, respectively, for the three and nine months ended September 30, 1998 versus $159,000 and $268,000 for the three and nine months ended September 30, 1997. The increase was due to a higher debt balance coupled with a higher rate of interest paid on the Company's debt at September 30, 1998 versus the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES 11 At September 30, 1998, the Company's cash and cash equivalents totaled $2,058,000 as compared to $1,938,000 at December 31, 1997, and its current ratio was .4 to 1. The Company's short-term investments totaled $133,000 at December 31, 1997. The Company has two revolving credit facilities that provide for borrowings of up to $1,133,000. At September 30, 1998, $1,133,000 was outstanding on the revolving loan agreements with no additional funds available on the facilities. In addition, the Company's U.K. subsidiary has an overdraft credit facility of $425,000 (L250,000). The outstanding balance on this facility is payable on demand of the lender. At September 30, 1998, borrowings on this facility were $425,000 (L250,000). The Company has guaranteed the borrowings on this facility. In October 1998, the Company and the bank agreed to extend the facility through January 15, 1999 for $425,000 (L250,000) at 3% per annum over the bank's base rate. See Note 6 of the Notes to the Consolidated Financial Statements. Certain events of default under each of the Company's revolving loan agreements and under the Subordinated Debenture occurred as a result of a restatement of the Company's interim financial information and annual financial statements for 1996 and the interim information for the first three quarters of 1997 which restatement was announced in May 1998. The lenders under such agreements and the Subordinated Debenture have agreed to waive such events of default for 1997 in the case of the lender under the Company's revolving loan agreements and for a period of one year expiring in May 1999 in the case of the holder of the Subordinated Debenture. Such lender and holder have also waived compliance with certain financial covenants for one year expiring in May 1999. At that time the Company anticipates it will be in default under its revolving agreements as a result of its continued non-compliance with a covenant requiring a minimum ratio of debt to tangible net worth. There can be no assurances that the Company will be able to secure from its lenders the further waiver of such anticipated event of default or any other event of default after May 1999. If such events of default are not then waived, the Company may then be required to repay the full amount of its outstanding indebtedness under the revolving credit agreements and the Subordinated Debenture. Defaults in the payment of such indebtedness or in the performance of other covenants under the agreements related to such indebtedness, whether occurring prior to or after May 1999, could also result in the Company being required to repay the full amount of such indebtedness. In addition, because the overdraft credit facility of the Company's U.K. subsidiary is payable upon demand, the Company could be required at any time to repay all outstanding borrowings under such 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. For the first nine months of 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. 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. The Company also received cash provided by financing activities through net borrowings under the Company's revolving loan and bank agreements. For the first nine months of 1997, cash used in operating and investing activities totaled $2,779,000 and $3,112,000, respectively, while cash provided by financing activities totaled $4,309,000. Due to significant losses incurred in 1997 and lower forecasted sales, the Company has restructured its operations and reduced its payroll cost, the largest cost element, by approximately 25% from the level prevailing at the end of 1997. In addition, the Company has made further reductions of other expenditures. The Company believes that as the result of the reduction of its costs through the restructuring of its operations, funds generated from operations will be adequate to meet expected short-term needs for working capital, subject to continued forbearance from the Company's lenders. However, the Company's ability to continue operations without additional capital is dependent upon the Company's ability to sustain revenues from its existing customer base and to sell new systems. Given the substantial uncertainties confronting the Company, there can be no assurance that sufficient cash flows will be generated by the Company to avoid the further depletion of its working capital. Accordingly, the Company is seeking additional equity or debt financing. There can be no assurance that additional debt or equity financing will be available, if and when needed, or that, if available, such financing could be completed on commercially favorable terms. Failure to obtain additional financing, if and when needed, could have a material adverse effect on the Company's business, results of operations, and financial condition. 12 Net Operating Loss Tax Carryforwards As of December 31, 1997, the Company had a net operating loss carryforward ("NOL") for federal and state income tax purposes of $40,549,000 and $10,239,000, respectively. In addition, the Company generated but has not used research and investment tax credits for federal income tax purposes of approximately $500,000, which will substantially expire in the years 2000 through 2005. Under the Internal Revenue Code of 1986, as amended (the "Code"), the Company generally would be entitled to reduce its future Federal income tax liabilities by carrying unused NOL forward for a period of 15 years to offset future taxable income earned, and by carrying unused tax credits forward for a period of 15 years to offset future income taxes. However, the Company's ability to utilize any NOL and credit carryforwards in future years may be restricted in the event the Company undergoes an "ownership change," generally defined as a more than 50 percentage point change of ownership by one or more statutorily defined "5-percent stockholders" of a corporation, as a result of future issuances or transfers of equity securities of the Company within a three-year testing period. In the event of an ownership change, the amount of NOL attributable to the period prior to the ownership change that may be used to offset taxable income in any year thereafter generally may not exceed the fair market value of the Company immediately before the ownership change (subject to certain adjustments) multiplied by the applicable long-term, tax-exempt rate announced by the Internal Revenue Service in effect for the date of the ownership change. A further limitation would apply to restrict the amount of credit carryforwards that might be used in any year after the ownership change. As a result of these limitations, in the event of an ownership change, the Company's ability to use its NOL and credit carryforwards in future years may be delayed and, to the extent the carryforward amounts cannot be fully utilized under these limitations within the carryforward periods, these carryforwards will be lost. Accordingly, the Company may be required to pay more Federal income taxes or to pay such taxes sooner than if the use of its NOL and credit carryforwards were not restricted. Over the past five years the Company has issued equity securities in connection with the private placement in June 1997, the Trimco acquisition in December 1995, the Optigraphics acquisition in September 1993 and through traditional stock option grants to employees. Although there has been no "ownership change" in 1997, this activity, combined with the liquidity available to stockholders, increase the potential for an "ownership change" for income tax purposes. In connection with the acquisition of Trimco, the Company acquired deferred tax assets of approximately $926,000 of which approximately $626,000 was provided as a valuation allowance. In June 1997, the $300,000 tax asset was realized and a reduction to goodwill was recorded. In the event that remaining tax benefits acquired in the Trimco acquisition are realized, tax benefits will be used first to reduce any remaining goodwill and other intangible assets related to the acquisition. Once those assets are reduced to zero, the benefit will be included as a reduction of the Company's income tax provision. In connection with the acquisition of Optigraphics, the Company acquired Optigraphics' net operating losses which are limited to offset against that entity's future taxable income, subject to annual limitations. 13 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Uncertain Impact of Restatement of Financial Statements In May 1998 the Company reported restated financial results for 1996 and the first three quarters of 1997. See the Company Annual Report on Form 10-K for the year ended December 31, 1997 (the "Form 10-K"). In addition, the report of the Company's independent accountants, Price Waterhouse LLP, on the Company's consolidated financial statements as of and for the year ended December 31, 1997 includes an explanatory paragraph regarding the Company's ability to continue as a going concern. See "Report of Independent Accountants" accompanying the Consolidated Financial Statements in the Form 10-K. The Company's public announcement of the restatement of its financial statements, delays in reporting operating results for the year ended December 31, 1997 while the restatement was being compiled, delays in reporting first quarter of 1998 results, the de-listing of the Company's Common Stock from the Nasdaq National Market, corporate actions to restructure operations and reduce operating expenses, and customer uncertainty regarding the Company's financial condition are likely to have a material adverse effect on the Company and its ability to sell its products in the future. Foreign Currency The Company's geographic markets are primarily in the United States and Europe, with sales in other parts of the world. In the nine months ended September 30, 1998, revenue from the United States, Europe and other locations in the world were 61%, 35% and 4%, respectively. This compares to 59%, 36% and 5%, respectively for the same period in 1997. The European currencies have been relatively stable against the U.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a significant impact on the Company's revenues or results of operations. The Company has recently increased its sales efforts in international markets outside Europe, including Asia and Latin America, whose currencies have tended to fluctuate more relative to the U.S. dollar. In addition, the current continued weakness in Asian currencies may result in reduced revenues from the countries affected by this condition. Changes in foreign currency rates, the condition of local economies, and the general volatility of software markets may result in higher or lower proportion of foreign revenues in the future. Although the Company's operating and pricing strategies take into account changes in exchange rates over time, there can be no assurance that future fluctuations in the value of foreign currencies will not have a material adverse effect on the Company's business, operating results and financial condition. New Accounting Pronouncements In 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" as amended by Statement of Position 98-4 ("SOP 98-4"). The Company adopted the provisions of SOP 97-2 as of January 1, 1998 and as a result, changed certain business practices. SOP 98-4 is effective as of September 30, 1998. The adoption has, in certain circumstances, resulted in the deferral of software license revenues that would have been recognized upon delivery of the related software under preceding accounting standards. At this time the Company cannot quantify the effect that SOP 97-2 will have on its operating results, financial position or cash flows. 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. 14 Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. The Company has recently commenced a program, to be substantially completed by the Fall of 1999, to review the Year 2000 compliance status of the software and systems used in its internal business processes, to obtain appropriate assurances of compliance from the manufacturers of these products and agreement to modify or replace all non-compliant products. In addition, the Company is considering converting certain of its software and systems to commercial products that are known to be Year 2000 compliant. Implementation of software products of third parties, however, will require the dedication of substantial administrative and management information resources, the assistance of consulting personnel from third party software vendors and the training of the Company's personnel using such systems. Based on the information available to date, the Company believes it will be able to complete its Year 2000 compliance review and make necessary modifications prior to the end of 1999. Software or systems which are deemed critical to the Company's business are scheduled to be Year 2000 compliant by the end of 1998. Nevertheless, particularly to the extent the Company is relying on the products of other vendors to resolve Year 2000 issues, there can be no assurances that the Company will not experience delays in implementing such products. If key systems, or a significant number of systems were to fail as a result of Year 2000 problems or the Company were to experience delays implementing Year 2000 compliant software products, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. The Company, in its ordinary course of business, tests and evaluates its own software products. The Company believes that its software products are generally Year 2000 compliant, meaning that the use or occurrence of dates on or after January 1, 2000 will not materially affect the performance of the Company's software products with respect to four digit date dependent data or the ability of such products to correctly create, store, process and output information related to such date data. To the extent the Company's software products are not fully Year 2000 compliant, there can be no assurance that the Company's software products contain all necessary software routines and codes necessary for the accurate calculation, display, storage and manipulation of data involving dates. In addition, in certain circumstances, the Company has warranted that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to four digit date dependent data or the ability to create, store, process and output information related to such data. If any of the Company's licensees experience Year 2000 problems, such licensees could assert claims for damages against the Company. To date, the Company has not created a separate budget for investigating and remedying issues related to Year 2000 compliance whether involving the Company's own software products or the software or systems used in its internal operations. There can be no assurances that Company resources spent on investigating and remedying Year 2000 compliance issues will not have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the purchasing patterns of customers and potential customers may be affected by Year 2000 issues. Many companies are expending significant resources to correct their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company, which could have an adverse effect on the Company's business, results of operations and financial condition. 15 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 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. See Note 9 of the Consolidated Financial Statements for a description of the class action securities litigation for which the Company is a defendant. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES The Company has defaulted on certain debentures and preferred stock. See Notes 6 and 7 of the Consolidated Financial Statements and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: The Annual Meeting of Shareholders was held August 27, 1998. At the meeting, the shareholders 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 625,000 to 925,000 shares. The proposal was approved with 7,847,102 proxies voting for, 474,851 voting against, and 50,640 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) Exhibits - See Exhibit Index on Page 18. (b) Form 8-K, dated September 21, 1998. 16 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: November 16, 1998 --------------------------------- 17 EXHIBIT INDEX
Exhibit - ------- 10.23 Overdraft and Other Facilities dated October 19, 1998 Between Altris Software Ltd and Lloyds Bank Plc
18 EX-10.23 2 EXHIBIT 10.23 [LETTERHEAD] The Directors, Altris Software Ltd, Altris House 53-55 Uxbridge Road, EALING, London W5 5SA Your Ref: Our Ref:PC/LDS 19 October, 1998 Dear Sirs, OVERDRAFT AND OTHER FACILITIES - ------------------------------ We Lloyds Bank Plc (the "Bank") are pleased to offer to Altris Software Ltd an overdraft facility on account number 1408939 on the following terms and conditions. Amount The maximum aggregate amount outstanding under the - ------ facility at any one time (calculated on the basis of cleared funds) shall not exceed -L-250,000 effective December 1, 1998, -L-275,000 from November 1, 1998 through November 30, 1998. Availability Any amounts from time to time owing under the facility - ------------ are repayable on demand but it is the Bank's present intention to make the facility available until 15th January 1999. All moneys from time to time owing to the Bank under this facility shall be repaid no later than this date or such later date as may from time to time be advised in writing by the Bank. The amounts owing at any time may include interest, costs or charges debited to the account in accordance with the terms of this letter. Interest Interest is calculated on the cleared daily balance of - -------- the account and will be payable on amounts owing at 3% per annum over the Bank's Base Rate from time to time (currently 10.25% per annum in total). Interest will be debited to the account quarterly in arrears (normally on the 20th of each of March, June, September and December or on the next working day) and additionally on the date upon which the facility ceases to be available. The Bank's Base Rate may be varied (either up or down) by the Bank at any time. Notices of changes will be displayed in the branch of the Bank where your account is held. - 2 - Costs and Charges Charges will be payable on the account quarterly as - ----------------- shown in the enclosed tariff schedule. These charges will be debited to the account and may be varied by the Bank at any time and notice of changes will be advised to you. An arrangement fee of -L-625 is payable. This will be debited to the account in the next few days. All costs and expenses incurred by the Bank in preserving or enforcing the security referred to below shall be debited to the account under advice to you. Security It is a condition of the overdraft facility and of the - -------- other facilities referred to below that amounts owing shall be secured by the following. Any security which is not already in place is to be provided to the Bank in a form acceptable to the Bank. - A debenture dated 4th December 1991 limited to the sum of -L-250,000. - An unlimited all monies guaranteed dated 11th March 1993 from Altris Group Plc. - An all moneys guaranteed dated 1st September 1996 for a principle amount of -L-300,000 plus interest and other costs as detailed in the guarantee from Altris Inc. Other Facilities In addition to the overdraft facility we are pleased - ---------------- to offer to you an open credit facility of -L-15,000 to cover arrangements to cash your cheques at other banks or at branches of the Bank other than Horley branch. The limit detailed above is the maximum value of cheques that may at any one time have been cashed but not yet forwarded to Horley branch for payment. A Lloydslink payments facility continues to be available to you under and subject to the terms and conditions set out in the agreement to cover the transfer of funds from your account by automated means initiated by you. The following limits apply to the facility. -L-100,000 the maximum total value of Lloydslink transactions that have been initiated through the PC Pay module, but have not been debited to your account ("three day value payments"). These additional facilities will be available upon such terms and conditions as shall from time to time be required by the Bank and may be cancelled by the Bank at any time, but it is the Bank's present intention to keep these facilities in place for the period of availability of the overdraft facility. Your liability in respect of any utilization of these facilities may, however, extend beyond such period of availability. - 3 - Financial Information Whilst any of the overdraft facility and the other - --------------------- facilities remain available you should provide to the Bank copies of: (a) Your audited annual accounts, and (b) Your monthly management accounts, as soon as possible after the end of the period to which they relate which shall not be later than 150 days in respect of your annual accounts or 30 days in respect of your management accounts from the end of each relevant period. Period of Offer Please confirm your acceptance of the overdraft - --------------- facility and of the other facilities offered by returning the attached duplicate of this letter with the acknowledgement signed in accordance with the Bank Mandate currently held by the Bank. If such confirmation is not received by this office by 30th October 1998 the offer will lapse. Yours faithfully, For and on behalf of Lloyds Bank Plc. /s/ Paul Candler - ------------------------ Paul Candler Senior Manager. Accepted by: /s/ John W. Low - ------------------------------------ 10/28/98 John W. Low, Chief Financial Officer EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 2,058 0 1,448 0 316 294 7,927 (6,199) 14,134 9,272 0 2,898 0 61,297 (63,307) 14,134 9,684 9,684 5,536 5,536 1,779 0 (492) (5,449) 0 (5,449) 0 0 0 (5,449) (.60) (.60)
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