-----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, A9VxyEUn8YWEsP5JCoNg0NfyPs4L8c1T08sJzycmQ+zvLmvy9wu/mBfl0rNL3OfO pUYjxZFw4camran8MmEiUw== 0001047469-99-021203.txt : 19990518 0001047469-99-021203.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021203 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627941 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 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 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 ALTRIS SOFTWARE, INC. INDEX
Page Number ----------- 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
2 ALTRIS SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, 1998 -------------- ----------------- (unaudited) ASSETS 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 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' DEFICIT 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 -------------- -------------- -------------- --------------
The accompanying condensed notes are an integral part of these consolidated financial statements. 3 ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the three months ended March 31, -------------------- 1999 1998 ---- ---- 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
The accompanying condensed notes are an integral part of these consolidated financial statements. 4 ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three months ended March 31, -------------------- 1999 1998 ---- ---- 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 -------------- -------------- -------------- --------------
The accompanying condensed notes are an integral part of these consolidated financial statements. 5 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 - --------------------
March 31, 1999 December 31, 1998 -------------- ----------------- 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 --------------- --------------- --------------- ---------------
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:
March 31, December 31, 1999 1998 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 ----------- ----------- ----------- -----------
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 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 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.
For the three months ended March 31, ------------------------------------ 1999 1998 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 --------------- -------------- --------------- --------------
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:
March 31, March 31, 1999 1998 ----------- ----------- 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 ----------- ----------- ----------- -----------
Information by geographic location for the quarter ended March 31, 1999 and 1998 follows:
March 31, 1999 ------------------------------------------------------------------- United Corporate States Europe Research & Development Consolidated ------ ------ ---------------------- ------------ 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
March 31, 1998 ------------------------------------------------------------------- United Corporate States Europe Research & Development Consolidated ------ ------ ---------------------- ------------ 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
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 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 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 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 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 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 391 0 495 0 275 193 7,951 (6,583) 9,485 9,383 0 3,108 0 61,096 (70,268) (9,172) 2,385 2,385 1,372 1,372 1,011 0 (163) (2,364) 0 (2,364) 0 0 0 (2,364) (.26) (.26)
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