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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
Commission file number 0-15935
ALTRIS SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
California 95-3634089
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9339 Carroll Park Drive, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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(Cover page continues on next page)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock on March 11, 1998, held by
non-affiliates* of the Registrant, based upon the last price reported on the
Nasdaq National Market on such date was $20,729,213.
The number of shares outstanding of the Registrant's Common Stock at the
close of business on March 11, 1998, was 9,614,663.
*Without acknowledging that any individual director of Registrant is an
affiliate, all directors have been included as affiliates with respect to shares
owned by them.
PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" under Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in,
or incorporated by reference into, this report.
ITEM 1. BUSINESS
Altris Software, Inc. (the "Company") develops, markets and supports a
suite multi-tier client/server document management software products. These
products enable users in a broad range of industries to manage, share and
distribute critical business information, expertise and other intellectual
capital in an efficient manner. The Company's products provide several key
business benefits including interoperability and scalability across an
enterprise, an extensive range of product tools and features, quick
cost-effective implementation, increasing network efficiency using the
Company's targeted image extraction technology ("TIE-Technology-TM-") to
substantially reduce network bandwidth requirements and the ability to
document-enable existing applications. In addition, the open architecture of
the Company's products permits them to be used in a standardized fashion and
enables sophisticated customization and integration with existing business
applications. Unlike many of its competitors, the Company offers its own
cohesive set of software products which provide a complete electronic
document management system ("EDMS") without the high systems integration
costs that can be incurred when disparate products from a variety of
suppliers must be integrated.
The Company has historically sold its suite of products through its direct
sales force and through complementary indirect channels primarily consisting of
value-added resellers ("VARs"), systems integrators and original equipment
manufacturers ("OEMs"). The Company has established a strong market presence in
the utility, manufacturing, transportation and petrochemical and other
processing industries both domestically and internationally. The Company
intends to increase market penetration in these industries as well as in certain
other select vertical markets, including telecommunication providers, defense
and other governmental agencies, electrical and electronic equipment
manufacturers, engineering and construction firms, property management companies
and architecture firms.
HISTORY
The Company was incorporated in California in 1981. Throughout the mid
1980's, the Company focused on the development and manufacturing of proprietary
hardware components, as well as software, for EDMS. The Company's systems at
that time included a significant portion of imaging hardware components
developed and manufactured by the Company. In subsequent years, the Company
moved from proprietary hardware components for EDMS to open architecture,
client/server software systems, while also providing system integration
services. As part of this change, the Company implemented a restructuring
program that reduced costs and consolidated operations to a level consistent
with sales.
As a result of its early success, which generated a need for additional
capital to finance expected growth, the Company completed the initial public
offering of its common stock in June 1987, raising net proceeds of approximately
$19.6 million. In December 1991, seeking further financing to fund expected
growth, the Company issued common stock and warrants through a unit offering.
The Company received net proceeds of approximately $2,600,000 upon issuing
750,000 units at a unit price of $4.25. In January 1992, the underwriter in the
unit offering exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. Each unit consisted of
two shares of the Company's common stock and one warrant to purchase one share
of common stock at an exercise price of $4.25. In 1995, such underwriter
exercised warrants which were issued to it in connection with the offering for
net proceeds of $382,000. Also in 1995, warrants were exercised for 459,446
shares of common stock, resulting in total proceeds to the Company of
$3,848,000.
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In September 1993, the Company acquired Optigraphics Corporation
("Optigraphics") for consideration valued at $8,400,000, comprised of $2,700,000
in cash, 1,120,559 shares of the Company's common stock and $1,734,000 in notes
which were paid in full in September 1995. Optigraphics, which was founded in
1982, provided software imaging solutions for enterprise systems, along with
traditional departmental systems. The Company was attracted to Optigraphics for
a number of factors, including the technology behind its sophisticated
workstation products, strong engineering organization, broad customer base,
including customers in the telecommunications industry, experienced national
sales force and international reseller distribution capabilities.
On December 27, 1995, the Company acquired United Kingdom-based Trimco
Group plc ("Trimco") for total consideration of $14,165,000. Trimco, at the
time of acquisition, was recognized as a leading developer of software products
for the capture, viewing, mark-up editing, storage, distribution and workflow
management of documents. The purchase price was comprised of $5,550,000 in
cash, 857,394 shares of the Company's common stock and a convertible promissory
note having a total principal amount of $1,000,000 due September 27, 1996 with
interest payable at 7% per annum. In addition, the purchase price included
obligations assumed which were payable to certain Trimco employees in connection
with the acquisition, consisting of cash of $1,051,000 and 50,300 shares of the
Company's common stock. Trimco was incorporated in 1988 in the United Kingdom
and has its principal offices in Ealing, London. Trimco's products focused on
applications involving office documents as well as technical documents such as
engineering drawings and blueprints and were marketed primarily through VARs,
distributors and systems integrators. The Company's purchase of Trimco brought
the total number of customers to approximately 1,500 worldwide, representing
major markets in utilities, transportation, petrochemicals, manufacturing,
construction, telecommunications and media, government and financial services.
On October 24, 1996, the Company changed its name from Alpharel, Inc. to
"Altris Software, Inc." to better reflect the integration of the Alpharel and
Trimco organizations and products.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% Subordinated Debenture due June 27, 2002
with a principal amount of $3,000,000 (the "Subordinated Debenture") and
warrants to purchase additional shares of Common Stock. The aggregate gross
proceeds to the Company from the private placement before expenses were
$6,000,000. The Series D Preferred Stock bears a dividend of 11.5% per
annum, accruing quarterly, and is convertible into shares of the Company's
common stock at a conversion price of $6.00 per share (subject to reset on
June 27, 1999 to the average closing price of the common stock on the 20
trading days immediately prior to June 27, 1999 if such average is less than
$6.00 per share). The Company may redeem any or all of the Series D
Preferred Stock at its stated value on or after June 27, 1999 at any time the
20-day average of the closing price of the common stock equals or exceeds
$9.50 per share, and the Company may redeem any or all of the Series D
Preferred Stock on or after June 27, 2002 at its stated value irrespective of
the trading price of its common stock. The Subordinated Debenture, which was
issued at 100% of par, provides for quarterly interest payments and has a
maturity date of June 27, 2002. The Company may prepay the Subordinated
Debenture prior to maturity without penalty. As a result of the restatement
of the Company's financial information and related circumstances, events of
default under the Series D Preferred Stock and Subordinated Debenture have
occurred. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters", and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Factors That May Effect Future Results."
THE INDUSTRY
In today's marketplace, organizations are increasingly looking for
solutions to help manage their business information. Many companies are
overwhelmed by the amount and variety of information generated by their vendors,
customers, employees and consultants. As a result, organizations are seeking
computer-based information management solutions that enable them to improve
productivity, reduce costs, react quickly to changes in their marketplace,
improve customer service or comply with regulatory and quality certification
requirements.
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Relational database management systems ("RDBMS") from leading companies
such as Oracle, Informix, Sybase Inc. and others were developed to enable
companies to manage certain business information such as customer names,
addresses and phone numbers, sales and accounting records, billing information
and inventory records. This type of data is often referred to as "structured"
data and is generally entered and stored in tables consisting of rows and
columns. While RDBMS enable companies to better store, process and analyze
their structured data, they were not designed to manage so-called "unstructured"
data.
Unstructured data, which can be broadly described as data that can not be
contained in a structured environment (i.e., rows and columns), includes
information generated by most software for personal computers and workstations,
such as word processing documents, spreadsheets and computer-aided design
("CAD") drawings, as well as other types of information which may not be in
electronic format, such as manufacturing procedures, maintenance records,
training and technical manuals, facility layouts, blueprints, product and parts
drawings, specifications, schematics, invoices, checks and other business
records, presentation graphics, photos, audio and video clips and facsimile
documents. A substantial portion of corporate data is unstructured.
Unstructured data is commonly contained in large object files which are often
referred to as a "binary large object," which files can create network
efficiency problems for organizations that collaborate electronically either on
local area networks ("LANs") or wide area networks ("WANs"). Network traffic
and bandwidth limitations have historically been, and continue to be, one of the
major constraints on the deployment of enterprise-wide document management
solutions. Without the resolution of bandwidth limitations, enterprise-wide
document management systems often provide poor response time to users or limit
the maximum number of simultaneous users supported by a network system.
Awaiting the availability of bigger bandwidth is not a solution, as the demand
for bandwidth continues to increase as users begin to utilize increasingly
complex data types such as pictures, audio and video clips.
Whatever the format and wherever the location, unstructured data represents
information which is essential to a company's business and which forms a key
part of a company's intellectual capital. In today's competitive marketplace,
companies need the ability to leverage their intellectual capital; however,
limitations on a company's ability to access, process and communicate this
information has restrained the productivity of businesses at both the individual
and team levels. Without an effective means of obtaining business information,
workers are often forced to re-create documents from scratch, duplicating effort
and increasing the margin for error. In addition, professionals often spend a
significant amount of their time locating documents rather than engaging in
higher-value activities. Additional complexity results where documents must be
accessed and revised by teams of workers dispersed throughout an enterprise who
may operate different desktop software and computers. The lack of effective
tools for communicating and sharing information and for automating the business
logic makes this process even more time-consuming, inefficient and error-prone.
Electronic document management systems were developed to enable customers
to effectively and efficiently manage, share and distribute critical business
information. The Gartner Group, an information technologies consulting group,
has estimated that in 1997 revenues generated from software sales in the global
integrated document management market totaled $490 million.
A true EDMS solution is often viewed by organizations as part of their
information systems' re-engineering, and as a result there are several
significant issues organizations typically consider when evaluating an EDMS
solution. Such issues include scalability of the system, the ability to
integrate with existing structural databases and other applications such as
document workflow and product data management ("PDM"), the price of the system,
the ability to view multiple document formats, the level and cost of integration
services required, the impact of the system on network bandwidth, integration
with existing business processes, the ability to control document security, the
ability to operate on existing computing infrastructure and with existing
applications, the system architecture and the ability to handle large and
complex data types and to customize the product to the client's particular
needs. In addition, organizations also consider user related issues such as the
ability to search, retrieve, view, annotate and edit data in a controlled
manner.
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THE ALTRIS SOFTWARE SOLUTION
The Company's suite of multi-tier, client/server document management
software products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The Company's suite of products provides several key business
benefits, including those described below:
INTEROPERABILITY/ENTERPRISE SCALABILITY. The Company's suite of products
operates on most common hardware, software, network and database platforms,
including Microsoft Windows, Windows 95, Windows NT and UNIX operating systems
and Oracle, Microsoft, Informix and Sybase database platforms. In addition, the
Company's products are designed for enterprise-wide scalability so that
organizations can deploy solutions that not only meet the needs of departments
but also scale to an entire enterprise with multiple divisions and thousands of
users worldwide.
EXTENSIVE FUNCTIONALITY. The document management and library functions of
the Company's products allow businesses to store, organize and manage both
simple and complex documents within their organizations. Users can find and
access information through full or partial field searches or full text searches
by keyword or by a combination of words. The Company's products provide
extensive computerized controls designed to permit only authorized users to
access information. In addition to the document management and library
functions, the Company's products also include powerful tools enabling users to
make comments, annotations and redline overlays on documents on-line without
changing the underlying information, thus replacing traditional markups on paper
documents and streamlining the review process. The Company's products integrate
with existing e-mail systems and run in conjunction with popular Internet Web
Browsers such as Netscape and Microsoft Internet Explorer.
ABILITY TO BE TAILORED. The Company's embedded application programming
interfaces ("APIs") simplify tailoring by both users and application developers,
thereby enabling customers to effectively customize and integrate applications
with existing information infrastructure. The Company's Toolkits include APIs
for document viewing, scanning, markup, editing, and printing, plus manipulating
data in document databases.
FASTER, MORE COST-EFFECTIVE IMPLEMENTATION. The Company provides a
complete EDMS solution which includes its own multi-format document manager that
allows users to view, annotate and edit a variety of different types of
documents, while also providing a look and feel consistent with the Company's
products. As a result, the Company believes that the overall cost of
implementing its EDMS solution is significantly lower than competitive systems
in the marketplace, which typically require the customized integration of
viewing, annotation and editing products from disparate software producers.
IMPROVE NETWORK EFFICIENCY. The Company's TIE-Technology substantially
reduces network traffic, decreases the time it takes to access and view
documents and increases the maximum number of simultaneous users supported by a
network system, technology which the Company believes provides it with a
significant competitive advantage.
DOCUMENT-ENABLE EXISTING APPLICATIONS. The Company's "document-enabling"
software allows users to integrate the power of electronic document management
directly into a user's business applications, providing users with greater
access to information from which to make business decisions and extending the
life of these business applications. The Company's document-enabling software
has been integrated with a number of leading PDM, human resources, manufacturing
and accounting software systems.
STRATEGY
The Company's strategy includes the following key elements:
EXTEND TECHNOLOGY LEADERSHIP. The Company continually seeks to extend its
position as a technology leader in developing and marketing document management
solutions. The Company intends to do this by (i) continuing to enhance the
features and functionality of its current products, including by adding and
enhancing tools that allow users to customize the graphical user interfaces
("GUIs"), layout and menu items to fit their own needs; (ii) designing
additional APIs to simplify tailoring by both users and application
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developers; and (iii) providing users with administrative tools that enable
systems operators to monitor individual use, network traffic and printing
volume.
Currently, the Company is reengineering for release its Altris EB-TM-
product which is built on a multi-tier architecture, allowing users to choose
between "thin" and "thick" client models on the desktop (including
Internet/intranet) and to deploy process and data servers more efficiently. (A
"thin" client model uses a client/server architecture with most of the
applications stored on the server rather than on the client while a "thick"
client model stores most of the applications on the client rather than the
server.) Altris EB is designed to provide a wide range of tools for information
exchange and review, system administration, configuration and tailoring plus
desktop tools for easy modification of the look-and-feel and extension of
functionality. Altris EB will support common enterprise tools such as
Microsoft-Registered Trademark- FrontOffice, BackOffice-TM- and MS-Mail-TM-.
FOCUS DIRECT SELLING EFFORTS ON SELECT VERTICAL MARKETS. The Company
focuses its direct sales force on select vertical markets with compelling
business needs for the Company's document management solutions. The Company has
established a strong market presence in the utility, manufacturing,
transportation and petrochemical and other processing industries both
domestically and internationally. The Company intends to continue its direct
sales and marketing force to increase its market penetration in these industries
as well as in certain other select vertical markets, including telecommunication
providers, defense and other governmental agencies, electrical and electronic
equipment manufacturers, engineering and construction firms, financial
institutions, property management companies and architecture firms.
EXPAND INDIRECT DISTRIBUTION CHANNELS. The Company intends to continue to
build and develop its existing VAR, systems integrator and OEM channels which
are targeted primarily at industries not covered by its direct sales force in
order to reach the broadest customer base. The Company is expanding its VAR and
systems integrator channel by increasing training and support programs,
developing additional software tools to facilitate configuration and recruiting
additional VARs and systems integrators in key geographical and vertical
markets.
PROVIDE COMPLETE SOLUTIONS. The Company intends to continue to provide (i)
complete EDMS solutions which include the Company's multi-format document
manager; (ii) an extensive range of product tools and features that are
interoperable and scaleable across an enterprise and that can be rapidly
deployed at relatively low cost; and (iii) greater network efficiencies than
competitive products. The Company has a comprehensive service and support
organization that is designed to ensure both international and domestic
customers' successful implementation and use of its suite of products. The
Company believes its customers' success in implementing and using the Company's
products is critical to sustaining references and repeat sales from its customer
base.
CUSTOMERS
The following are examples of customers who are using the Company's
products:
UTILITIES. Within the utilities industry, countless documents relating to
plant management, facility maintenance and support, transmittal processing and
tracking, matrix security and statutory compliance must be current and readily
available at all times. Furthermore, with pending deregulation, utilities are
under increasing pressure to minimize their costs. The Company has installed
document management solutions at more than 25 utilities around the world. In
one example, a commercial utility was relying on more than 2,000,000 microfilm
documents, 750,000 paper documents and 110,000 aperture cards (a form of
microfilm technology) for its daily operations. Beginning in the engineering
department, the Company added a document management solution containing its
TIE-Technology which transformed the paper system into an integrated part of the
utility's existing applications, including its work flow applications. The
utility purchased a license for an enterprise-wide deployment covering 2,000
individual users. The Company's solution enables all current and historic plant
records, including those generated by word processors and spreadsheet programs,
to be readily available throughout the utility.
TRANSPORTATION. In the rail transportation segment, countless documents
relating to scheduling, structures, track and signaling must be current and
readily available at all times. For example, one of the world's oldest and
largest public transportation systems had more than 3,000,000 maintenance and
safety documents stored on aperture cards and microfiche, and manual handling
processes were straining efficient
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operation. The Company's document management solution and TIE-Technology now
enables users quick access to all documents on-line, including the documents
described above as well as accounts payable and invoice records, internal
letters and memoranda and other business records, with additional search,
optical character recognition ("OCR") and E-mail functionality. Today, the
system can be accessed and operated by over 1,500 individual users who can
retrieve critical business information whenever necessary on a
near-instantaneous basis, thereby enabling this public transportation system to
better ensure regulatory compliance.
MANUFACTURING. One of the world's largest manufacturers of earth-moving
and construction equipment has a vast network of independent dealers in over 128
countries. With product information contained in more than 4,200,000
engineering drawings, CAD files, manufacturing documents and aperture cards,
dealers providing customer service in these countries were often forced to wait
for the results of lengthy searches and incurred costly delivery charges. The
Company supplied this manufacturer with a document management solution for
storing and retrieving the millions of pages of product information. Today,
over 15,000 users perform more than 20,000 views and prints per day at locations
around the world with information requests filled in seconds rather than days.
PETROCHEMICAL. In the highly regulated petrochemical industry, companies
must have the ability to quickly access critical information for safety,
maintenance and regulatory compliance purposes. One of the world's largest
petrochemical companies operates oil platforms in the North Sea from its
principal facilities in Scotland and Norway. Large engineering drawings,
detailed schematics, maintenance instructions and other intricate documentation
often had to be delivered by boat or helicopter, creating substantial delays.
By using the Company's TIE-Technology, this customer was able to transmit
documents to its oil platforms directly by satellite. As a result of the
success of the system, the Company was asked to install document management
software at three other sites. The resulting document management solution
currently has thousands of individual users worldwide and manages all forms of
documents, including paper-based documents, business applications and CAD
created documents.
FINANCIAL SERVICES. A major bank in the United Kingdom is using the
Company's office document management system to provide on-line customer services
at all of its locations. Customers can retrieve current account information and
view canceled checks, statements and loan documents on-line. The Company's
document management solution is also being used at a major U.S. bank to
facilitate the high-speed processing of checks, coupons, letters, invoices and
envelopes for corporate and commercial customers. This high-volume system
processes hundreds of thousands of receivables a day, which are posted and
available for viewing electronically more quickly than through traditional
services.
SALES AND MARKETING
DIRECT SALES
The Company focuses its direct sales force on select vertical markets with
compelling business needs for the Company's document management solution. The
Company has established a strong market presence in the utility, manufacturing,
transportation and petrochemical and other processing industries both
domestically and internationally. The Company's strategy is to continue its
direct sales and marketing to increase its market penetration in these
industries as well as in certain other select vertical markets, including
telecommunication providers, defense and other governmental agencies, electrical
and electronic equipment manufacturers, engineering and construction firms,
financial institutions, property management companies and architecture firms.
As of May 1, 1998, the Company's sales and marketing organization consisted
of 31 employees primarily based in Company sales offices located in the U.S. and
in London, England. Additionally, the Company's field sales force regularly
conducts presentations and demonstrations of the Company's suite of products to
management and users at the customer site as part of the direct sales effort.
Sales cycles for the Company's products generally last from six to twelve
months.
INDIRECT DISTRIBUTION CHANNELS
Although the Company has historically generated the majority of its
revenues from its direct sales force, the Company has also established a network
of third-party VARs, system integrators and OEMs who
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build and sell systems (with components or complete systems provided by the
Company) that address specific customer needs within various vertical markets,
including those targeted directly by the Company. Sales through indirect
channels accounted for 18% and 19% of the Company's total revenue for the years
ended December 31, 1997 and 1996, respectively.
The Company's strategy is to continue to build and develop its existing
VAR, systems integrator and OEM channels which are primarily targeted at the
industries and geographic regions not covered by its direct sales force in order
to reach the broadest customer base. The VARs and systems integrators are an
integral part of the Company's distribution strategy as they are responsible for
identifying potential end-users, selling the Company's products to end-users as
part of a complete hardware and software solution, customizing and integrating
the Company's products at the end-user's site and supporting the end-user
following the sale. Additionally, the Company intends to focus increased effort
on growing its VAR and systems integrator channel through increasing training
and support programs, developing additional software tools to facilitate
configuration and recruiting additional VARs and systems integrators in key
geographical and vertical markets.
Set forth below are several of the VARs, systems integrators and OEMs with
whom the Company has entered into cooperative sales arrangements:
Adepso Deverrill Plc Structural Dynamic
Alpha Numeric Solutions Excitech Computers Systemhouse
AMS GE Capital Consulting Simdell Office Systems
CACI Information Systems Koren Projects SMI Software
CAD Capture MDIS Softology
Computing Devices Metaphase Staffware
Data General Octagon Computing Systeica
Datel Persetel TELSOC
There can be no assurance that any customer, VAR, systems integrator or OEM
will continue to purchase the Company's products. The failure by the Company to
maintain its existing relationships, or to establish new relationships in the
future, could have a material adverse effect on the Company's business, results
of operations and financial condition.
MARKETING COMMUNICATIONS
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, channel marketing,
promotions, seminars, trade shows, telemarketing and ongoing customer and
third-party communications programs. The Company also seeks to stimulate
interest in its products through public relations, speaking engagements, white
papers, technical notes and programs targeted at educating consultants about the
capabilities of the Company and its products.
SERVICES AND SUPPORT
The Company believes that a high level of services and support are critical
to its performance. As a result, the Company maintains a telephone hotline to
provide technical assistance and software support directly to its end-users on
an as-needed basis. The Company also provides technical support, maintenance,
training and consulting to its VARs, systems integrators and OEMs, which in turn
provide technical support services directly to end-users. These services are
designed to increase end-user satisfaction, provide feedback to the Company as
to end-users' demands and requirements and generate recurring revenue. The
Company plans to continue to expand its services and support programs as the
depth and breadth of the products offered by the Company increase.
VAR, SYSTEMS INTEGRATORS AND OEM SUPPORT
The Company employs pre-sales, technical support personnel that work
directly with VARs, systems integrators and OEMs to provide responses to
technical sales inquiries. The Company also offers educational and training
programs, as well as customized consulting services to its VARs, systems
integrators and OEMs. Fees for training and consulting services are generally
charged on a per diem basis. The Company also provides product information
bulletins on an ongoing basis, including bulletins posted
7
through its Internet web site and through periodic informational updates about
the products installed. These bulletins generally answer commonly asked
questions and provide information about new product features.
TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company, in conjunction with its VARs and systems integrators, offers
end-users a software maintenance program that includes software updates provided
by the Company to end-users and technical support provided by the VARs and
systems integrators. Telephone consultation is provided by the Company to VARs
and systems integrators to respond to end-user questions that VARs and systems
integrators are unable to answer. VARs and systems integrators typically charge
end-users a fee for maintenance and support of the entire EDMS and imaging
system, including software and hardware. In turn, the Company charges VARs and
systems integrators an annual fee based upon a percentage of the then-current
list prices of the licensed software.
WARRANTY
The Company generally includes a 90-day limited warranty with software
licenses. During the warranty period, end-users are entitled to corrections for
documented program errors. The services provided during the warranty period may
be extended by the end-user entering into the Company's software maintenance
program.
PRODUCTS
The Company's suite of multi-tier, client/server document management
software products enables users to effectively and efficiently manage, share and
distribute critical business information, expertise and other intellectual
capital. The underlying architecture for the Company's EDMS employs a model
designed to ensure scalability, modularity and high performance. The Company's
suite of products are grouped into three main categories, which are Core
Document Services, Client Interfaces and Toolkits.
CORE DOCUMENT SERVICES
The Company's EDMS Server, which is the central component of the document
management system, provides document capture, storage, distribution, version
control, check-in/check-out and process management. The EDMS Server manages
documents of all types, including CAD, image, multi-media and text, as well as
compound or virtual documents consisting of multiple document types and
documents that are edited in one format and distributed in another (for example,
editing a CAD application and distributing in an image format, or editing in
Microsoft Office and distributing in a printed document format). Some examples
of core document services include:
- CAPTURE. Documents are loaded individually or in batches and moved
through a process which includes quality control, indexing and
storage. Multiple indexing options are provided, including indexing
by structured fields, keywords or full text. For documents residing
in hardcopy format, an intermediate recognition step is performed by
optical character recognition ("OCR") to create searchable ASCII text.
In addition, the Company's COLD technology provides the ability to
capture structured data and retain and present it in report format,
allowing searches against the reports.
- LIBRARY SERVICES. The EDMS Server provides comprehensive library
functions, including storage, management, distribution, routing,
check-in/check-out, version control and change management. Documents
of all formats are managed in a secure environment which can provide
distribution to authorized users at remote sites. The EDMS Server
permits storage to a wide variety of media, including CD-ROM, magnetic
disk, optical disks and a redundant array of inexpensive disks
("RAID") and uses caching and other functions to enhance performance.
The EDMS Server enables the secure check-in/check-out of documents for
editing, routing for comment or approval and management of the
revision history. The EDMS Server also provides stereo vaulting
capability, enabling two editions of documents to be stored, one for
editing and one for viewing distribution.
8
- IMAGE MANAGEMENT. Image is an important data type in any EDMS
solution. The EDMS Server architecture is designed for both simple
and complex image management. The Company's multi-format document
manager allows users to view, annotate and edit a variety of different
types of documents, while also providing a look and feel consistent
with the Company's products. In addition, to address network traffic
limitations, the Company's TIE-Technology allows monochrome images
(in industry and international standard formats) to be displayed
with only about 5-10% of the network traffic of many competing
products. This performance is achieved across most popular network
types.
- DISTRIBUTION. Documents can be distributed in hard copy through a
printer, plotter or fax machine. The output can be tagged with
information such as the date and time, the identity of the requestor
and a standard warning label. The output is automatically rotated and
scaled for optimum fit to paper. Documents can also be distributed
on-line over LANs, WANs and the Internet, thereby facilitating
annotating, redlining and editing. Additionally, documents can be
distributed through a wide variety of other media, including CD-ROM,
magnetic disk, optical disks and RAID. To address network traffic
limitations, the Company has developed its TIE-Technology which
displays documents at significantly faster rates than competing
products. The Company has also developed Secure File Access which
permits a company to restrict access and editing within an EDMS on a
document-by-document basis, as compared to competitive products
employing a network file system that only restrict access at the
client/server level.
CLIENT INTERFACES
The Company offers a variety of system GUIs to allow users to obtain the
most desirable combination of functionality and style. Key system interfaces
include:
- TARGET. The Company's Target product is designed for office
environments and provides a graphical interface to the EDMS Server,
enabling users to search for, display and route documents. In
addition, Target enables users to add documents and access such
functions as graphical work-flow and full text search. Such functions
are optional add-ons.
- PRO EDM. Pro EDM is designed for users in technical and engineering
organizations that need the capability to manage very large and
complex documents in hardcopy or electronic format. Pro EDM offers
the ability to manage these large and complex format documents, as
well as all of the functionality of the Company's Target product.
- INTERNET/INTRANET. In many companies, the Internet and Intranet are
becoming extremely popular as an interface for the general user
population. The Company's products integrate with existing e-mail
systems and also run in conjunction with popular Internet Web Browsers
such as Netscape and Microsoft Internet Explorer, allowing users to
search and display documents through the Internet and Intranet without
the need for any client-side software. As an option, however, users
can choose to install a local copy of the Company's view software for
higher display performance.
- DOCUMENT-ENABLED APPLICATIONS. The Company's "document-enabling"
software allows users to integrate the power of electronic document
management imaging directly into a user's business applications,
providing users with greater access to information from which to make
business decisions and extending the life of these business
applications. The Company's document enabling software has been
integrated with a number of leading PDM, workflow and accounting
software systems.
- MULTI-FORMAT DOCUMENT MANAGER. The Company's multi-format document
manager allows users to view, annotate and edit a variety of different
types of documents, while also providing a look and feel consistent
with the Company's products. More than 100 document formats are
supported. By employing TIE-Technology, the Company believes its
products deliver superior display performance without significant
impact on the network.
9
- CAD CONNECT AND ACROBAT CONNECT. The Company's CAD Connect
distributes documents from the CAD system as a raster edition, enables
redlining on the raster edition and further enables the incorporation
of the redlining into the original CAD file following import. The
redlines are registered against the original just as they were against
the raster image and can be used by the drafter as a reference or for
direct incorporation. Acrobat Connect provides PDF capability within
a document management system.
TOOLKIT
The Company's customers generally have unique needs for their document
management systems and associated user interfaces. To address these needs,
the Company provides embedded APIs to simplify tailoring by both users and
application developers, thereby enabling customers to effectively customize
and integrate applications with existing information infrastructure. The
Company's toolkits include APIs for document viewing, scanning, markup,
raster editing and printing, as well as APIs for manipulating data in
document databases. The Company also offers toolkits that provide customers
with the ability to document-enable applications built with C/C++,
Powerbuilder and Visual BASIC, as well as existing, legacy UNIX, mini or
mainframe applications.
The Company's desktop products run on Microsoft Windows, Windows 95,
Windows NT, Macintosh and UNIX operating systems, and its EDMS Server supports a
range of server hardware including a variety of UNIX platforms such as
Hewlett-Packard, IBM, Sun, Digital and Data General as well as Microsoft Windows
NT on both Intel and DEC Alpha platforms. The system operates in conjunction
with industry-standard RDBMS including Oracle, Sybase, Informix, Ingres and
Microsoft Sequel Server. The system also embeds leading full-text search
technologies from Fulcrum, Excalibur and BRS, and connects to leading e-mail
packages such as Microsoft Mail and cc:Mail.
Pricing for the Company's systems can vary substantially based upon the
particular features of the system and peripheral-device content (e.g., scanners,
printers, workstations, etc.). While pilot systems begin at a price of
approximately $15,000 for a small target system, the price of full scale
enterprise systems can range up to several million dollars. In the past, most
systems ordered from the Company have ranged from $150,000 to $1,500,000. Once
an electronic document management system is installed, the Company generally
receives ongoing revenues from follow-on contracts as a result of enhancements,
expansion and maintenance. Enhancements can modify a system in order to, among
other things, accommodate more documents or users, interface with different
peripheral devices, update the system with recently developed improvements
(including improvements which increase the speed of the system) or implement
other changes in response to changes in the customer's general data processing
environment. Variations in both the size and timing of orders can result in
significant fluctuations in the Company's revenues on a quarterly basis.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on providing
customers with the most technologically advanced solutions for their document
management needs. The Company believes that the marketplace is rapidly moving
toward demanding that all corporate information, both structured and
unstructured, simple and complex, be managed as a consistent and interconnected
global enterprise network. This trend demands that products and services work
across technology platforms, business processes and geographic locations to
establish real-time document management systems with imaging capabilities. The
need to manage global enterprise networks encompasses many different forms of
information, including small and large documents and other complex information
objects (x-rays, photos, color JPEG files, etc.). The Company has responded to
this market evolution by developing new approaches to deal with the problem of
accessing very large documents or information objects over WANs and LANs and
intends to continue to devote research and development activity to this area.
The Company intends to continue to extend its position as a technology
leader in developing and marketing document management solutions that include
imaging capability. The Company intends to do this by continuing to enhance the
features and functionality of its current products, including tools to allow
users to customize the GUIs, layout and menu items of the EDMS to fit their own
needs, designing additional APIs to simplify tailoring by both users and
application developers and administrative tools to enable systems operators to
monitor individual use, network traffic and printing volume. The Company also
10
intends to continue to enhance the performance of its current products,
including advancing its TIE-Technology to work with larger and more complex
documents, adopting parallel three-tier architecture and also developing tools
to reduce telecommunication expenses for the distribution and replication of
data over geographically dispersed systems. Through leveraging its technology,
the Company also plans to introduce new products and product extensions which
are complementary to its existing suite of products and which address both
existing and emerging market needs, including expanding the applications for its
document-enabling capabilities and its TIE-Technology.
In 1997, 1996 and 1995, the Company's research and product development
expenses were approximately $4,051,000, $3,363,000 and $1,402,000,
respectively. Development is also conducted within the scope of a customer
contract if a customer requires additional functionality not provided by the
Company's present systems. Technical expenses which include project
management, installation, project design specification and other project
related expenses, included in cost of revenues were $2,786,000, $2,607,000
and $2,140,000 for 1997, 1996 and 1995, respectively.
In 1997, a substantial portion of the Company's development efforts was
devoted to its next-generation Altris EB product offering. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future. Following the initial release of Altris EB in
late 1997, problems were discovered during internal and external testing of
the product which resulted in the Company's withdrawal of the product pending
further evaluation. A large quality assurance and engineering team from the
Company's San Diego and London staffs convened in the United Kingdom to work
on analyzing these problems. This led to a determination that certain
portions of the product would require reengineering. The Company currently
expects to complete a preview release of Altris EB in July 1998. This
version of the product would not be offered for use in a production
environment, but would instead be made available to certain customers and
partners of the Company to allow them to evaluate the product's functionality
and to commence the development of applications for use with the product.
The Company currently expects to release in December 1998 a version of the
product for early shipment for integration into the operating environments of
a limited number of Altris customers and partners. The purpose of this
limited rollout would be to confirm that the product is sufficiently robust
to withstand current complex operating system environments. General
distribution of Altris EB is projected to be available in the first quarter
of 1999. The Company intends to offer Altris EB as a free upgrade for
customers under maintenance contracts. The Company will charge separately
for any installation or integration costs. This general release version of
the product is expected to serve as a platform for additional functionality
and features to be added in the future, including SmartPush-TM- technology.
SmartPush would enable a user to subscribe to types of information of
interest and to be notified automatically when new documents or changes to
that type of information occur on the system. See "Item 1.
Business-Strategy" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Operating Expenses."
There can be no assurance that the Company will be successful in completing
the re-engineering of the Altris EB product, or that such product will receive
market acceptance or be delivered timely to the market. The Company's product
development efforts with respect to Altris EB are expected to continue to
require substantial investments by the Company, and there can be no assurance
that the Company will have sufficient resources to make the necessary
investments. The Company has experienced product development delays in the
past, and may experience delays in the future. Delays in the scheduled
availability or lack of market acceptance of the Company's Altris EB product, or
failure to accurately anticipate customer demand and meet customer performance
requirements, including as a result of attrition in the Company's engineering
staff, could have a material adverse effect on the Company's results of
operations and financial condition.
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introduction and other
market activities of industry participants. The Company currently encounters
direct competition from a number of public and private companies such as
Documentum, Inc., FileNet Corporation (and its Saros subsidiary), Novasoft and
PC DOCS. Many of these direct competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company also
expects that direct competition will increase as a result of recent
consolidation in the software industry.
11
The Company also faces indirect competition from systems integrators and
VARs. The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as for recommendation of its products to potential purchasers. Although
the Company seeks to maintain close relationships with these service providers,
many of these third parties have similar, and often more established,
relationships with the Company's principal competitors. If the Company is
unable to develop and retain effective, long-term relationships with these third
parties, the Company's competitive position would be materially and adversely
affected. Further, there can be no assurance that these third parties will not
market software products in competition with the Company in the future or will
not otherwise reduce or discontinue their relationship with, or support of, the
Company and its products. In addition, RDBMS vendors, such as Oracle, Informix
and Sybase, and other software developers such as Microsoft, may compete with
the Company in the future. Like the Company's current competitors, many of
these companies have longer operating histories, significantly greater resources
and name recognition and a larger installed base of customers than the Company.
The Company believes that the principal competitive factors affecting its
market include system features such as scalability of the system, the ability to
integrate with existing structural databases and other applications such as
document workflow and PDM, the ability to provide image management capability,
the price of the system, the level and cost of integration required, the impact
of the system on network bandwidth, integration with existing business
processes, the ability to operate on existing computing infrastructure and with
existing applications, the system architecture and the ability to handle large
and complex data types and to customize products to the client's needs. In
addition, organizations also consider features such as the ability to search,
retrieve, view, annotate and edit data in a controlled manner. Although the
Company believes that it currently competes favorably with respect to the
factors referenced above, there can be no assurance that the Company can
maintain its competitive position against current and any potential competitors,
especially those with greater financial, marketing, service, support, technical
and other resources than the Company.
In addition, the Company's public announcement in March 1998 of the pending
restatement of its financial statements, delays in reporting operating results
for the year ended December 31, 1997 while the restatement was being compiled,
threatened de-listing of the Company's Common Stock from the Nasdaq National
Market as a result of the Company's failure to satisfy its public reporting
obligations, 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's ability to sell
its products in the future against competition.
PRODUCT BACKLOG AND CURRENT CONTRACTS
The Company's contract backlog consists of the aggregate anticipated
revenues remaining to be earned at a given time from the uncompleted portions
of its existing contracts. It does not include revenues that may be earned
if customers exercise options to make additional purchases. At December 31,
1997, the Company's contract backlog was $9,610,000, as compared to
$5,405,000 at December 31, 1996. The Company expects $8,210,000 of the
December 31, 1997 backlog to be completed in 1998, as compared to $3,650,000,
of the December 31, 1996 backlog which the Company then expected to complete
in 1997. The amount of contract backlog is not necessarily indicative of
future contract revenues because short-term contracts, modifications to or
terminations of present contracts and production delays can provide
additional revenues or reduce anticipated revenues. The Company's backlog is
typically subject to large variations from time to time when new contracts
are awarded. Consequently, it is difficult to make meaningful comparisons of
backlog.
The Company's contracts with its customers customarily contain provisions
permitting termination at any time at the convenience of the customer (or the
U.S. Government if the Company is awarded a subcontract under a prime contract
with the U.S. Government), upon payment of costs incurred plus a reasonable
profit on the goods and services provided prior to termination. To the extent
the Company deals directly or through prime contractors with the U.S. Government
or other governmental sources, it is subject to the business risk of changes in
governmental appropriations. In order to reduce the risks inherent in competing
for business with the U.S. Government, the Company has directed its government
contracts marketing efforts toward teaming with large corporations, who
typically have existing government contracts, can alleviate the cash flow
burdens often imposed by government contracts and have more extensive experience
in and resources for administering government contracts. The Company does not
have any
12
contractual arrangements regarding such joint marketing efforts. In the past,
such efforts have been pursued when deemed appropriate by the Company and such
corporations in response to opportunities for jointly providing systems or
services to potential government agency customers.
PATENTS AND TECHNOLOGY
The Company's success is dependent in part upon proprietary technology.
The Company owns certain U.S. and foreign patents covering certain aspects of
its document management systems technology including two patents concerning the
technology used to present the raster data to the view, markup or edit user very
quickly which involve data storage/transmission and scaling algorithms which
utilize industry standards. The Company also owns a patent on technology to
allow edit users to make changes to documents without having to specify whether
they are working on raster or vector data and a patent for a cinematic revisory
capability that allows users to modify and store drawing changes in raster and
vector format for subsequent review of the original document and each sequential
revision. There can be no assurance that the Company's patents will be found
valid if challenged or, if valid, will provide meaningful protection against
competition. While the Company believes that the protection afforded by its
patents will have value, the rapidly changing technology in the industry makes
the Company's success largely dependent on the technical competence and creative
skills of its personnel.
The Company also relies on a combination of trade secret, copyright and
non-disclosure agreements to protect its proprietary rights in its software and
technology. There can be no assurance that such measures are or will be
adequate to protect the Company's proprietary technology. Furthermore, there
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
The Company's software is licensed to customers under license agreements
containing provisions prohibiting the unauthorized use, copying and transfer of
the licensed program. Policing unauthorized use of the Company's products is
difficult and, while the Company is unable to determine the extent to which
piracy of its software products exists, any significant piracy of its products
could materially and adversely affect the Company's financial condition and
result of operations. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States and there can be no assurance that the Company's means of
protecting its proprietary rights will be adequate.
In addition, the Company also relies on certain software that it licenses
from third parties, including software that is integrated with internally
developed software and used in the Company's products to perform key functions.
There can be no assurances that the developers of such software will remain in
business, that they will continue to support their products or that their
products will otherwise continue to be available to the Company on commercially
reasonable terms. The loss of or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed and integrated, which
could adversely affect the Company's business, operating results and financial
condition.
The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
EMPLOYEES
As of May 1, 1998, the Company had 124 full-time employees, of whom 49 were
engaged in product development and application engineering activities, 31 in
customer support and implementation, 31 in sales and marketing and 13 in
administration. The Company also utilizes consultants for specific projects.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes its relationship with its
employees is good. Competition for
13
qualified personnel in the industry in which the Company competes is intense and
the Company expects that such competition will continue for the foreseeable
future. The Company believes that its future success will depend, in large
measure, on its ability to continue to attract, hire and retain qualified
employees and consultants.
14
ITEM 2. PROPERTIES
The Company's headquarters are located in San Diego, California. The
Company leases 31,016 square feet of a 40,000 square foot building in San Diego.
The term of the lease is through March 2001, at a monthly rent of $17,059, with
annual increases of approximately 4%.
In October 1996, the Company closed its engineering and sales office in
Camarillo, California, approximately 50 miles northwest of Los Angeles. The
facility is currently subleased (see Note 12 to the Consolidated Financial
Statements). The lease covers 19,400 square feet of a 40,000 square foot
building. The term of the lease is through April 2001. The monthly rent is
$12,349, subject to annual adjustments not to exceed 4% in any year. The lessor
waived five months rent during the lease term.
The Company's United Kingdom subsidiary leases a facility which occupies
18,000 square feet in Ealing, London. The term of the lease is through March
2001. The monthly rent is $20,006.
The Company also leases a facility in Florida under a lease which expires
in 2002. The monthly rent is $5,444. See Note 12 of the Notes to the
Consolidated Financial Statements for further information regarding the
Company's lease commitments.
15
ITEM 3. LEGAL PROCEEDINGS
Between March 16, 1998 and May 1, 1998, six complaints alleging violations
of the federal securities laws were filed against the Company and certain of its
present and former officers and directors in the United States District Court
for the Southern District of California. The complaints are purported class
actions filed by individuals who allege that they purchased the Company's stock
during the purported class periods. The first complaint alleges a class period
of October 30, 1996 through October 7, 1997. The four complaints filed
thereafter allege a class period of April 17 or 18, 1996 through March 11 or 13,
1998. In addition to the Company, all six complaints name Jay V. Tanna and John
W. Low as defendants. Two of the complaints also name Stephen P. Gardner as a
defendant.
The complaints allege that the Company and the individual defendants issued
false and misleading statements in the Company's filings with the Securities and
Exchange Commission, reports to investors, press releases, statements to
securities analysts and other public statements regarding the Company's
financial results, its future prospects and the success of its new products.
Plaintiffs allege that the Company's financial results for 1996 and the first
three quarters of 1997 were falsely reported through improper revenue
recognition on sales made through the Company's VAR customers. The complaints
allege violations of sections 10(b) and 20(a) of the Securities Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek certification as class
actions, compensatory damages in unspecified amounts, prejudgment and
postjudgment interest, attorneys fees, expert witness fees and other costs, and
unspecified extraordinary equitable and/or injunctive relief.
The parties in the cases in which the complaints have been served have
entered into stipulations regarding the schedule for plaintiffs to file
motions to consolidate the cases and to appoint lead plaintiffs and lead
plaintiffs' counsel and for defendants to respond to the complaints.
Defendants have not filed any answers, motions to dismiss or other responsive
pleadings in these cases. In accordance with the stipulations, defendants
will respond to these actions following the filing of a consolidated amended
complaint.
The Company's bylaws and indemnification agreements between the Company and
its current and former officers and directors provide that the Company shall
indemnify its current and former officers and directors for certain liabilities
arising from their employment with or service to the Company to the fullest
extent permitted by law. The agreements provide that the indemnification
extends to any and all expenses, liabilities or losses (including attorneys
fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be
paid in settlement, any interest, assessments, or other charges imposed thereon,
and any
16
federal, state, local or foreign taxes) reasonably incurred in connection with
the investigation, defense or participation in actions, suits or proceedings
that relate to the service of the indemnitee as a director or officer of the
Company or to any act or omission in the indemnitee's capacity as an officer or
director of the Company.
The Company has purchased directors' and officers' and corporate liability
insurance to reimburse it for the costs incurred in connection with its
indemnification obligations described above and for liabilities and costs of
defense in connection with any securities claims filed against the Company and
its directors and officers. For the period from June 30, 1997 to June 30, 1998,
the period in which the claims against the Company and certain of its officers
and directors were asserted, the Company has in place a directors' and officers'
and corporate liability insurance policy providing $3 million in coverage issued
by the Admiral Insurance Company. The Company has notified the insurance
company of the complaints filed against the Company and the individual
defendants. Counsel retained by the insurance company has notified the Company
that it is in the process of reviewing the complaints and will provide the
insurance company's coverage position in the near future. In the meantime, the
insurance company has reserved all rights, remedies and defenses it currently
has and may subsequently acquire.
The pending federal securities actions are at a very early stage. No
motions or responsive pleadings have been filed and no discovery has begun.
Consequently, at this time it is not reasonably possible to predict whether the
Company will incur any liability or to estimate the damages, or the range of
damages, that the Company might incur in connection with such actions. However,
the uncertainty associated with substantial unresolved litigation can be
expected to have a material adverse impact on the Company's business. In
particular, such litigation could impair the Company's relationships with
existing customers and its ability to obtain new customers. Defending such
litigation will likely result in a diversion of management's time and
attention away from business operations, which could have a material adverse
effect on the Company's results of operations. Such litigation may also have
the effect of discouraging investors or lenders from providing additional
equity or debt to the Company and discouraging potential acquirors from
seeking to acquire the Company or reducing the consideration such aquirors
would otherwise be willing to pay in such an acquisition.
In addition to the securities actions described above, the Company is
involved from time to time in litigation arising in the normal course of
business. The Company believes that any liability with respect to such routine
litigation, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the fourth quarter of 1997.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ALTS." The following table shows, for the calendar quarters
indicated, the high and low sale prices of the Common Stock on the Nasdaq
National Market:
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $4.26 $2.62
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 3.50 2.38
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . 14.76 3.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 12.00 8.12
YEAR ENDED DECEMBER 31, 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $13.88 $7.26
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 18.00 8.76
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 12.50 7.38
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 10.63 5.75
YEAR ENDED DECEMBER 31, 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $8.25 $4.50
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 6.75 3.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 9.75 5.69
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 8.19 2.75
The stock prices listed above have been restated to reflect the one-for-two
reverse stock split effected by the Company on October 25, 1996.
On March 11, 1998, there were approximately 300 holders of record of the
Company's Common Stock and the last sale price of the Common Stock as reported
on the Nasdaq National Market on March 11, 1998 was $2.16 per share.
On March 11, 1998, as a result of the Company's announcement of the likely
restatement of its results of operations for 1996 and the nine months ended
September 30, 1997, The Nasdaq Stock Market suspended trading in the Company's
common stock. In addition, Nasdaq has commenced proceedings for the delisting
of the Company's common stock. If the Company's common stock is delisted by
Nasdaq, the Company would likely seek to commence trading on another
over-the-counter market. However, further trading in the Company's common stock
and the degree of liquidity provided to current shareholders through such
trading cannot be assured.
The Company has never paid a dividend on its Common Stock, and the current
policy of its Board of Directors is to retain all earnings to provide funds for
the operation and expansion of the Company's business. Consequently, the
Company does not anticipate that it will pay cash dividends on its Common Stock
in the foreseeable future.
On June 27, 1997, the Company completed a private placement to an
investor (the "Investor") of (i) 3,000 shares of its Series D Convertible
Preferred Stock with an aggregate stated value of $3,000,000 (the "Series D
Preferred Stock") and (ii) its 11.5% Subordinated Debenture due June 27, 2002
with a principal amount of $3,000,000 (the "Subordinated Debenture"), and
warrants to purchase additional shares of Common Stock. The aggregate gross
proceeds to the Company from the private placement before expenses were
$6,000,000. A summary of certain terms of the private placement is set forth
below.
18
CONVERTIBLE PREFERRED STOCK. The Series D Preferred Stock bears a
dividend of 11.5% per annum, accruing quarterly, and is convertible into
shares of the Company's common stock at a conversion price of $6.00 per share
(subject to reset on June 27, 1999 to the average closing price of the common
stock on the 20 trading days immediately prior to June 27, 1999 if such
average is less than $6.00 per share). The Company may redeem any or all of
the Series D Preferred Stock at its stated value on or after June 27, 1999 at
any time the 20-day average of the closing price of the common stock equals
or exceeds $9.50 per share, and the Company may redeem any or all of the
Series D Preferred Stock on or after June 27, 2002 at its stated value
irrespective of the trading price of its common stock. If an event of
default exists under the purchase agreement governing the issuance of the
Series D Preferred Stock (the "Preferred Stock Purchase Agreement"), then the
dividend rate increases to 14% per annum until such time as the event of
default is cured. In addition, if the Company fails to pay dividends on six
consecutive dividend payment dates, or the aggregate amount of unpaid
dividends equals or exceeds $172.50 per share, then the Investor shall be
entitled to nominate an additional director to the Company's board. As the
Company is currently in default under the Preferred Stock Purchase Agreement
as a result of the restatement of the Company's financial statements and
related circumstances, the dividend rate on the Series D Preferred Stock has
increased to 14%. Dividends on the Series D Preferred Stock of $147,000 were
declared and paid in 1997. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Factors That May Effect Future Results."
SUBORDINATED DEBENTURE. The Subordinated Debenture, which was issued at
100% of par, provides for quarterly interest payments with a maturity date of
June 27, 2002. The Company may prepay the Subordinated Debenture prior to
maturity without penalty. As a result of the restatement of the Company's
financial statements and related circumstances, events of default under the
Subordinated Debenture occurred. The Investor has agreed to waive such events
of default for a period of one year expiring in May 1999. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Factors That May Effect Future
Results."
WARRANTS AND CONTINGENT WARRANTS. In connection with the issuance of
the Series D Preferred Stock, the Company has agreed to grant to the Investor
warrants to purchase the following number of shares of its common stock if
the Series D Preferred Stock remains outstanding on each of the following
dates: (i) 50,000 shares, at an exercise price of $7.00 per share, on June
27, 2000 if the Series D Preferred Stock has not been redeemed or converted
in full on or prior to June 27, 2000; (ii) 50,000 shares, at an exercise
price of $7.00 per share, on June 27, 2001 if the Series D Preferred Stock
has not been redeemed or converted in full on or prior to June 27, 2001;
(iii) 250,000 shares, at an exercise price equal to the trading price per
share at the issuance of the warrant, on July 17, 2002 if the Series D
Preferred Stock has not been redeemed or converted in full on or prior to
July 17, 2002; and (iv) 250,000 shares, at an exercise price equal to the
trading price per share at the issuance of the warrant, on June 27, 2003 if
the Series D Preferred Stock has not been redeemed or converted in full on or
prior to June 27, 2003. In connection with the issuance of the Subordinated
Debenture, the Company granted to the Investor warrants to purchase 300,000
shares of its common stock at an exercise price of $6.00 per share. In
addition, the Company has agreed to grant to the Investor additional warrants
to purchase 50,000 shares of its common stock at an exercise price of $7.00
per share on June 27, 2000 if the Subordinated Debenture then remains
outstanding and on each anniversary thereafter on which the Subordinated
Debenture remains outstanding. Each warrant granted to the Investor expires
on the date that is five years from the date of grant of such warrant.
ISSUABLE MAXIMUM; MANDATORY REDEMPTION. If the number of shares issuable
upon conversion of the Series D Preferred Stock, when added to all other shares
of common stock issued upon conversion of the Series D Preferred Stock and any
shares of common stock issued or issuable upon the exercise of the warrants
issued to the Investor would exceed 1,906,692 shares of common stock (the
"Issuable Maximum"), then the Company shall be obligated to effect the
conversion of only such portion of the Series D Preferred Stock resulting in the
issuance of shares of common stock up to the Issuable Maximum, and the remaining
portion of the Series D Preferred Stock shall be redeemed by the Company for
cash in accordance with the procedures set forth in the Certificate of
Determination for the Series D Preferred Stock.
REGISTRATION RIGHTS. In connection with the issuance of the Series D
Preferred Stock, the warrants to purchase 300,000 shares of common stock and the
various contingent warrants to purchase shares of common stock, the Company
granted to the Investor certain registration rights for the underlying common
19
stock. Such registration rights include the right, subject to certain
conditions, to demand at any time and on up to three occasions that the Company
register such underlying shares for resale.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The financial data for each of the five years in the period ended
December 31, 1997 have been derived from the audited Consolidated Financial
Statements. The results of Trimco and Optigraphics are included below since
December 27, 1995 and September 23, 1993, the date of the acquisitions of each
of these companies, respectively (see Note 3 of the Notes to the Consolidated
Financial Statements).
The data set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Year Ended December 31,
----------------------------------------------------------------
Consolidated Statement of Operations Data 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except per share data)
Revenues $17,773 $19,549 $12,731 $ 9,547 $ 8,354
Cost of revenues 9,383 9,540 5,791 4,822 4,444
------- ------- ------- ------- -------
Gross profit 8,390 10,009 6,940 4,725 3,910
------- ------- ------- ------- -------
Operating expenses:
Research and development 4,155 3,363 1,402 769 1,108
Charge for purchased research and
development - - 10,595 - 4,920
Marketing and sales 8,179 5,581 3,570 2,627 1,361
General and administrative 4,241 3,077 1,581 1,146 907
Write down of assets to net
realizable value 190 - 1,664 - -
Restructuring expense - - - - 3,447
Loss on office closure - 410 - - -
------- ------- ------- ------- -------
16,765 12,431 18,812 4,542 11,743
------- ------- ------- ------- -------
(Loss) income from operations (8,375) (2,422) (11,872) 183 (7,833)
Interest and other income 383 88 137 207 183
Interest and other expense (447) (114) (95) (115) (54)
------- ------- ------- ------- -------
(Loss) income before income taxes (8,439) (2,448) (11,830) 275 (7,704)
Provision for income taxes - - - - -
------- ------- ------- ------- -------
Net (loss) income (8,439) (2,448) (11,830) 275 (7,704)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic net (loss) income per common share $ (.90) $ (.26) $ (1.68) $ 0.04 $ (1.29)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Diluted net (loss) income per common share $ (.90) $ (.26) $ (1.68) $ 0.04 $ (1.29)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Shares used in computing basic net (loss)
income per common share 9,585 9,250 7,026 6,992 5,986
Shares used in computing diluted net (loss)
income per common share 9,585 9,250 7,026 7,127 5,986
At December 31,
------------------------------------------------------------------
Consolidated Balance Sheet Data 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Working capital (deficit) $(1,977) $ 2,064 $ 939 $ 2,799 $ 5,007
Total assets 15,836 18,260 19,002 9,771 11,087
Long-term obligations 2,920 1,966 1,420 - 1,770
Mandatorily redeemable convertible preferred stock 2,682 - - - -
Shareholders' equity 2,048 9,863 8,116 5,658 5,364
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Certain Factors That May Affect Future Results" below and elsewhere in, or
incorporated by reference into, this report.
When used in the following discussion, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements, including
the Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of items included in the Company's Consolidated Statement of Operations
for each of the last three fiscal years:
For The Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 52.8 48.8 45.5
----- ----- -----
Gross profit 47.2 51.2 54.5
----- ----- -----
Operating expenses:
Research and development 23.4 17.2 11.0
Charge for purchased research and
development - - 83.2
Marketing and sales 46.0 28.5 28.0
General and administrative 23.9 15.8 12.4
Write down of assets to net realizable value 1.0 - 13.1
Loss on office closure - 2.1 -
----- ----- -----
94.3 63.6 147.7
----- ----- -----
Loss from operations (47.1) (12.4) (93.2)
Interest and other income 2.1 .5 1.0
Interest and other expense (2.5) (.6) (.7)
----- ----- -----
Loss before income taxes (47.5) (12.5) (92.9)
Provision for income taxes - - -
----- ----- -----
Net loss (47.5)% (12.5)% (92.9)%
----- ----- -----
----- ----- -----
REVENUES
Revenues were $17,773,000, $19,549,000 and $12,731,000 for 1997, 1996 and
1995, respectively. The decrease of $1,776,000 in 1997 compared to 1996 was the
result of a decline in sales of new large systems, which was partially offset by
an increase in revenues from system enhancements, expansions and maintenance.
The increase for 1996 over 1995 was the result of the expansion of business
opportunities and resources in both international and domestic markets as a
result of the acquisition of Trimco in December 1995. In addition, 1996
revenues increased due to sales of new software products and version releases.
21
New systems revenues in 1997, 1996, and 1995 were $6,839,000 (38%),
$10,262,00 (52%) and $6,285,000 (49%), respectively, while revenues from system
enhancements, expansion and maintenance were $10,934,000 (62%), $9,287,000 (48%)
and $6,446,000 (51%), respectively. System enhancements are changes to a system
previously installed by the Company in order to, among other things, accommodate
more documents or users, interface with different peripheral devices, update the
system with recently developed improvements (including improvements which
increase the speed of the system) or implement other changes in response to the
customer's general data processing environment. See "Item 1. Business - Sales
and Marketing."
In 1997, new system revenues decreased $3,423,000 from 1996 while
revenues generated from system enhancements, expansion and maintenance
increased $1,647,000. In 1997, the Company devoted substantial sales and
marketing efforts to its anticipated Altris EB product, the availability of
which has been substantially delayed as a result of unanticipated problems in
the performance of the product. See "Item 1. Business - Development."
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 in 1997 as compared to 1996. In addition, new system revenues in
1996 included a sale of one system which accounted for 12% of total revenues.
In 1996, new system revenues increased $3,977,000 from 1995, while revenues
from system enhancements, expansion and maintenance increased $2,841,000. The
increase in new system revenue was primarily due to orders received from large
corporate enterprise systems. The increase in system expansions, enhancements
and maintenance was due to continued expansions and enhancements by the
Company's growing installed customer base as the result of the acquisition of
Trimco in 1995.
A small number of customers has typically accounted for a large percentage
of the Company's annual revenues. One consequence of this has been that
revenues can fluctuate significantly on a quarterly basis. The Company's
reliance on relatively few customers could have a material adverse effect on the
results of its operations on a quarterly basis. Additionally, a significant
portion of the Company's revenues has historically been derived from the sale of
systems to new customers.
COST OF REVENUES
Gross profit as a percentage of revenues was 47%, 51% and 55% for 1997,
1996 and 1995, respectively. The decrease in gross profit margin in 1997
from 1996 was due primarily to the fact that software sales represented a
lower portion of total revenues. Software license revenues were $8,154,000,
$9,554,000 and $5,369,000 in 1997, 1996 and 1995, respectively, representing
46%, 49% and 42% of revenues, respectively. The decline in revenues
generated from software sales in 1997 from 1996 was primarily due to declines
in sales generated from new systems in 1997 compared to 1996. Although
software sales increased from 1995 to 1996, the gross profit percentage
decreased due to cost increases which were proportionately greater than
increases in revenues. In addition, less profitable third party software
sales represented a greater portion of total software sales in 1996 compared
to 1995. Service revenues, which include maintenance, training and consulting
services, decreased to $7,969,000 in 1997 from $8,158,000 in 1996, which had
increased from $5,029,000 in 1995. Technical expenses which include project
management, installation, project design specification and other project
related expenses, included in cost of revenues were $2,786,000 in 1997,
$2,607,000 in 1996 and $2,140,000 in 1995. Hardware sales, which have a lower
margin than software, decreased from $2,333,000 in 1995 to $1,837,000 in 1996
to $1,650,000 in 1997. The hardware gross profit margin each year has also
decreased. The Company's software and services are sold at a significantly
higher margin than third party products which are resold at a lower gross
profit percentage in order for the Company to remain competitive in the
marketplace. Gross profit percentages can fluctuate quarterly based on the
revenue mix of Company software, services, proprietary hardware and third
party software or hardware.
22
OPERATING EXPENSES
Research and development expense was $4,155,000, $3,363,000 and
$1,402,000 for 1997, 1996 and 1995, respectively. The increase from 1996 to
1997 was primarily due to increased personnel and related costs in 1997
compared to 1996. Research and development expense increased $1,961,000 in
1996 from 1995 primarily due to additional personnel from the acquisition of
Trimco. Research and development expense can vary based on the amount of
engineering service contract work required for customers versus purely
internal development projects. It may also vary based on internal
development projects in which technological feasibility and marketability of
a product are established. These costs are capitalized as incurred and then
amortized when the product is available for general release to customers.
Technical expenses on customer-funded projects are included in cost of
revenues, while expenses on internal projects are included in research and
development expense. See "Item 1. Business - Product Development."
In connection with the acquisition of Trimco, the Company allocated a
significant portion of the purchase price to purchased research and development
resulting in a charge of $10,595,000 in 1995. See Note 3 of the Notes to the
Consolidated Financial Statements. The charge relates to research and
development projects in process relating to Trimco's next generation of document
management products. At the date of acquisition, the technological feasibility
of acquired technology had not yet been established and the technology had no
future alternative uses. The Company has expended a significant portion of its
own engineering resources on the development of this technology for anticipated
new product offerings.
Marketing and sales expense was $8,179,000, $5,581,000 and $3,570,000
for 1997, 1996 and 1995, respectively. The increase from 1996 to 1997 was
primarily due to additional sales and support personnel hired and related
costs associated therewith. In addition, the increase is attributable in part
to costs incurred for advertising, brochures and trade shows in connection
with the initial marketing of the new Altris EB product suite, the Company's
next generation document management software, and efforts to increase name
recognition for the new "Altris" name which the Company adopted in October of
1996. The increase from 1995 to 1996 was primarily due to additional
personnel and other costs resulting from the addition of Trimco's operations.
In addition, the Company incurred additional marketing and promotional costs
as a result of its name change and from increasing its presence at trade
shows.
General and administrative expense was $4,241,000, $3,077,000 and
$1,581,000 for 1997, 1996 and 1995, respectively. The increase from 1996 to
1997 was due primarily to expenses associated with an increase in the
allowance for doubtful accounts, a contract dispute and an increase in legal
and professional fees, goodwill amortization, and investor relations
expenses. In addition, during the second quarter of 1997, the Company
wrote-off certain offering costs, resulting in a one-time charge to
operations in the amount of $270,000. The costs that were written-off were
not directly related to the private placement that occurred during the second
quarter of 1997. The increase from 1995 to 1996 was due primarily to
additional personnel and other costs resulting from the addition of Trimco's
operations. General and administrative expense includes amortization of
goodwill which increased from $66,000 in 1995 to $746,000 in 1996 and to
$853,000 in 1997.
In 1997, the Company wrote off $190,000 of certain software development
costs related to products for which costs were deemed to be unrecoverable due to
the future product direction of the Company.
In October 1996, the Company closed its facility in Camarillo, California
which served as a warehouse for hardware inventory and a remote engineering
office. As a result of such closure, the Company incurred a $410,000 loss which
was recorded in 1996. The Company's engineers who were in the Camarillo office
are now telecommuting from their homes and other locations. The $410,000 loss
resulted from subleasing the facility and additional costs related to the
relocation of employees and the movement of inventory and equipment to the
Company's headquarters in San Diego, California.
In connection with the acquisition of Trimco in 1995, the Company wrote-
down certain intangible assets to their net realizable value, resulting in a
$1,664,000 charge to operations. The write-down was a
23
result of the acceleration of the Company's plans to introduce a next-generation
suite of products. Management concluded in 1996 that the Company would be able
to complete the development of these new products sooner using the resources of
the combined companies, thus reducing the likelihood of recovering existing
capitalized software costs associated with the Company's current generation of
products. In addition, the costs of certain software development tools which
will not be utilized in the development of next-generation products, and certain
software products to be replaced, were written off.
INTEREST AND OTHER INCOME
Interest and other income was $383,000, $88,000 and $137,000 for
1997, 1996 and 1995, respectively. The increase in 1997 from 1996 was
primarily due to the subletting of a facility for rent equal to the Company's
obligation under non-cancellable terms for which the Company had previously
accrued a loss for the unfavorable lease. In addition, the increase in 1997
from 1996 was due primarily to higher short-term investment balances. The
decrease from 1995 to 1996 was primarily the result of lower short-term
investment balances.
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $447,000, $114,000 and $95,000 for 1997,
1996 and 1995, respectively. The increase for 1997 compared to 1996 was due to
a higher debt balance coupled with a higher rate of interest paid on the
Company's debt in 1997 as compared to 1996. The increase in interest expense
for 1996 compared to 1995 was due to the higher rate of interest paid on the
Company's debt. While the Company had a higher debt balance in 1995 versus
1996, the rate of interest paid was more favorable in 1995 than 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's cash and cash equivalents totaled
$1,938,000 as compared to $2,200,000 at December 31, 1996, and its current ratio
was .7 to 1. The Company's short-term investments totaled $133,000 at December
31, 1997 as compared to $90,000 at December 31, 1996. The Company has two
revolving credit facilities which provide for borrowings of up to $1,367,000.
At December 31, 1997, $574,000 was outstanding on the revolving loan agreements
and $793,000 was unused. In addition, the Company's U.K. subsidiary has an
overdraft credit facility of $660,000. The outstanding balance on this facility
is payable on demand of the lender. At December 31, 1997, borrowings on this
facility were $430,000. The Company has guaranteed the borrowings on this
facility. See Note 5 of the Notes to the Consolidated Financial Statements.
In 1997, cash provided by financing activities totaled $4,443,000 of which
$5,306,000 was generated by issuance of the Subordinated Debenture and the
Series D Preferred Stock in a private placement. This amount was partially
offset by net repayments on the Company's revolving loan agreement of
$909,000. Cash used in operating and investing activities in 1997 totaled
$2,355,000 and $2,372,000, respectively. In 1996, cash provided by financing
activities totaled $2,831,000 while cash used in operating and investing
activities totaled $2,944,000 and $2,346,000, respectively.
As a result of misapplications in its revenue recognition policies, the
Company has 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 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 Investor.
Such Lender and the Investor have also waived compliance with certain
financial convenants for one year expiring in May 1999. There can be no
assurances that the Company will be able to secure from its lenders a further
waiver of any events of default after May 1999. If such events of default
are not then
24
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.
Due to significant losses 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.
However, the Company intends to investigate raising additional cash through a
debt or equity offering. The Company believes that as the result of the
reduction of its costs through the restructuring of its operations, the
unused portion of the Company's credit facilities, and funds generated from
operations will be adequate to meet expected short-term needs for working
capital. 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 intends
to seek 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 affect on the Company's business, results of
operations, and financial condition.
On December 27, 1995, the Company acquired Trimco (see Note 3 to the
Consolidated Financial Statements). The cash portion of the consideration to
Trimco shareholders totaled $5,550,000. As part of the transaction, the Company
also issued a convertible note due in September 1996, having a principal balance
of $1,000,000 with interest payable at 7% per annum. In February 1996, the note
was converted into 125,000 shares of the Company's common stock. In addition,
in connection with the transaction, the Company assumed an accrued liability for
$1,051,000 payable to Trimco employees, which was paid in January 1996.
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.
25
Over the past five years, the Company has issued equity securities in
connection with the private placement in June 1997, the Trimco acquisition in
December 1995, the Optigraphics acquisition in September 1993 and through
traditional stock option grants to employees. Although there was no "ownership
change" in 1997, this activity, increases the potential for an "ownership
change" for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired $926,000
in deferred tax assets of which approximately $626,000 was provided as a
valuation allowance. In June 1997, the $300,000 tax asset was realized and a
reduction to goodwill was recorded. In the event that remaining tax benefits
acquired in the Trimco acquisition are realized, such benefits will be used
first to reduce any remaining goodwill and other intangible assets related to
the acquisition. Once those assets are reduced to zero, the benefit will be
included as a reduction of the Company's income tax provision.
In connection with the acquisition of Optigraphics, the Company acquired
Optigraphics' net operating losses which are limited to offset against that
entity's future taxable income, subject to annual limitations.
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 has 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 is adopting a plan to strengthen the Company's internal accounting
controls. This plan includes updating the Company's revenue recognition
policies regarding accounting and reporting for its customer contracts and
contracts with Value Added Resellers (VARs). The Company intends to
establish standard contract terms as approved by outside legal counsel. This
plan also includes developing and conducting in-house educational programs to
implement these policies. Implementation of these changes is expected to
require substantial management time.
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. The
Company's public announcement in March 1998 of the pending restatement of its
financial statements, delays in reporting operating results for the year
ended December 31, 1997 while the restatement was being compiled, threatened
de-listing of the Company's Common Stock from the Nasdaq National Market as a
result of the Company's failure to satisfy its public reporting obligations,
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 future.
FOREIGN CURRENCY
The Company's geographic markets are primarily in the United States and
Europe, with sales in other parts of the world. In fiscal 1997, revenue from
the United States, Europe and other locations in the world were 56%, 37% and 7%,
respectively. This compares to 65%, 28% and 7%, respectively in fiscal 1996.
In 1995, the Company operated principally in the United States and international
revenues were less than 10% of the Company's revenues. 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
26
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 will be required to
adopt the provisions of SOP 97-2 for transactions entered into on or after
January 1, 1998. SOP 98-4 is effective as of March 31, 1998. The adoption may,
in certain circumstances, result in the deferral of software license revenues
that would have been recognized upon delivery of the related software under
preceding accounting standards. In response to SOP 97-2, the Company will
likely change its business practices and, consequently, 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.
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
27
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No items.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Altris Software, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 54 present fairly, in all
material respects, the financial position of Altris Software, Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring losses from
operations and has an accumulated deficit that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/S/ PRICE WATERHOUSE LLP
San Diego, California
May 12, 1998
29
ALTRIS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
December 31,
------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $1,938,000 $2,200,000
Short term investments 133,000 90,000
Receivables, net 3,045,000 5,050,000
Inventory, net 460,000 472,000
Other current assets 633,000 683,000
---------- ----------
Total current assets 6,209,000 8,495,000
Property and equipment, net 2,270,000 2,156,000
Computer software, net 3,042,000 2,252,000
Goodwill, net 3,914,000 4,972,000
Other assets 401,000 385,000
---------- ----------
$15,836,000 $18,260,000
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,928,000 $2,487,000
Accrued liabilities 2,758,000 1,686,000
Notes payable 730,000 710,000
Deferred revenue 1,770,000 1,548,000
---------- ----------
Total current liabilities 8,186,000 6,431,000
Long term notes payable 274,000 1,203,000
Other long term liabilities 173,000 763,000
Subordinated debt, net of discount 2,473,000 -
---------- ----------
Total liabilities 11,106,000 8,397,000
---------- ----------
Commitments (Note 12)
Mandatorily redeemable convertible preferred stock,
$1,000 par value, 3,000 shares authorized; 3,000 shares
issued and outstanding ($2,682,000 total liquidation
preference) 2,682,000
Shareholders' equity:
Common stock, no par value, 20,000,000 shares authorized;
9,614,663 and 9,559,944 issued and outstanding,
respectively 61,600,000 61,583,000
Common stock warrants 585,000 -
Foreign currency translation adjustment 25,000 3,000
Accumulated deficit (60,162,000) (51,723,000)
---------- ----------
Total shareholders' equity 2,048,000 9,863,000
---------- ----------
$15,836,000 $18,260,000
---------- ----------
---------- ----------
See accompanying notes to the consolidated financial statements.
30
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
Revenues $17,773,000 $19,549,000 $12,731,000
Cost of revenues 9,383,000 9,540,000 5,791,000
----------- ----------- -----------
Gross profit 8,390,000 10,009,000 6,940,000
----------- ----------- -----------
Operating expenses:
Research and development 4,155,000 3,363,000 1,402,000
Charge for purchased research and
development - - 10,595,000
Marketing and sales 8,179,000 5,581,000 3,570,000
General and administrative 4,241,000 3,077,000 1,581,000
Write down of assets to net realizable value 190,000 - 1,664,000
Loss on office closure - 410,000 -
----------- ----------- -----------
Total operating expenses 16,765,000 12,431,000 18,812,000
----------- ----------- -----------
Loss from operations (8,375,000) (2,422,000) (11,872,000)
Interest and other income 383,000 88,000 137,000
Interest and other expense (447,000) (114,000) (95,000)
----------- ----------- -----------
Loss before income taxes (8,439,000) (2,448,000) (11,830,000)
Provision for income taxes - - -
----------- ----------- -----------
Net loss $(8,439,000) $(2,448,000) $(11,830,000)
----------- ----------- -----------
----------- ----------- -----------
Basic net loss per common share $ (.90) $ (.26) $ (1.68)
----------- ----------- -----------
----------- ----------- -----------
Diluted net loss per common share $ (.90) $ (.26) $ (1.68)
----------- ----------- -----------
----------- ----------- -----------
Shares used in computing basic and diluted
net loss per common share 9,585,000 9,250,000 7,026,000
See accompanying notes to the consolidated financial statements.
31
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at December 31, 1994 6,870,424 $43,103,000
Exercise of stock options 213,188 188,000
Exercise of underwriter unit warrants 75,000 382,000
Exercise of warrants 459,446 3,848,000
Issuance of Common Stock
in connection with acquisition 857,394 6,564,000
Issuance of Series B Preferred Stock 172,500 $3,306,000
Net loss
----------- ----------- ----------- -----------
Balance at December 31, 1995 172,500 3,306,000 8,475,452 54,085,000
Exercise of stock options 316,875 1,263,000
Conversion of Series B Preferred Stock to
Common Stock (172,500) (3,306,000) 406,617 3,306,000
Issuance of Series C Preferred Stock 100,000 1,964,000
Conversion of Series C
Preferred Stock to Common Stock (100,000) (1,964,000) 236,000 1,964,000
Conversion of note to Common Stock 125,000 965,000
Foreign currency translation adjustment
Net loss
----------- ----------- ----------- -----------
Balance at December 31, 1996 9,559,944 61,583,000
Exercise of stock options 54,719 193,000
Issuance of common stock warrants
Foreign currency translation adjustment
Preferred stock dividends (176,000)
Net loss
----------- ----------- ----------- -----------
Balance at December 31, 1997 - - 9,614,663 $61,600,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Foreign
Common Currency
Stock Translation Accumulated
Warrants Adjustment Deficit
-------- ---------- -------
Balance at December 31, 1994 $(37,445,000)
Exercise of stock options
Exercise of underwriter unit warrants
Exercise of warrants
Issuance of Common Stock
in connection with acquisition
Issuance of Series B Preferred Stock
Net loss (11,830,000)
----------- ----------- ------------
Balance at December 31, 1995 (49,275,000)
Exercise of stock options
Conversion of Series B Preferred Stock to
Common Stock
Issuance of Series C Preferred Stock
Conversion of Series C
Preferred Stock to Common Stock
Conversion of note to Common Stock
Notes receivable from officers
Foreign currency translation adjustment $3,000
Net loss (2,448,000)
----------- ----------- ------------
Balance at December 31, 1996 3,000 (51,723,000)
Exercise of stock options
Issuance of common stock warrants $585,000
Foreign currency translation adjustment 22,000
Preferred stock dividends
Net loss (8,439,000)
----------- ----------- ------------
Balance at December 31, 1997 $585,000 $25,000 $60,162,000
----------- ----------- ------------
----------- ----------- ------------
See accompanying notes to the consolidated financial statements.
32
ALTRIS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $(8,439,000) $(2,448,000) $(11,830,000)
Adjustments to reconcile net loss to net
Cash (used in) provided by operating activities:
Depreciation and amortization 2,389,000 2,000,000 797,000
Loss on disposal of assets 15,000 12,000 -
Charge for purchased research and development - - 10,595,000
Write down of assets to net realizable value 190,000 - 1,664,000
Changes in assets and liabilities, net of effect
of acquisitions:
Receivables, net 2,005,000 (843,000) (422,000)
Inventory 12,000 (3,000) 303,000
Other assets 328,000 (569,000) (161,000)
Accounts payable 441,000 295,000 (73,000)
Accrued liabilities 1,072,000 (1,525,000) 145,000
Deferred revenue 222,000 319,000 28,000
Other long term liabilities (590,000) (182,000) 145,000
----------- ----------- -----------
Net cash (used in) provided by operating activities (2,355,000) (2,944,000) 1,191,000
----------- ----------- -----------
Cash flows from investing activities:
Sale or maturity of short term investments held to maturity 1,652,000 180,000 1,534,000
Purchases of short term investments held to maturity (1,499,000) - -
Purchases of property and equipment (833,000) (1,142,000) (504,000)
Purchases of software (41,000) (306,000) (135,000)
Computer software capitalized (1,651,000) (1,078,000) (1,021,000)
Cash paid for acquisitions, net of cash acquired - - (5,785,000)
----------- ----------- -----------
Net cash used in investing activities (2,372,000) (2,346,000) (5,911,000)
----------- ----------- -----------
Cash flows from financing activities:
Principal payment under cash advanced by a bank
related to former Optigraphics shareholder
notes payable - (1,634,000) -
Repayments under notes payable (2,689,000) (212,000) (84,000)
Net borrowings under revolving loan and bank
agreements 1,780,000 1,450,000 700,000
Net proceeds from issuance of preferred stock 2,653,000 1,964,000 3,306,000
Payment of preferred stock dividends (147,000) - -
Net proceeds from issuance of subordinated debt and warrants 3,000,000 - -
Cash payments for debt issuance costs (347,000) - -
Proceeds from exercise of warrants - - 4,230,000
Proceeds from exercise of stock options 193,000 1,263,000 188,000
----------- ----------- -----------
Net cash provided by financing activities 4,443,000 2,831,000 8,340,000
----------- ----------- -----------
Effect of exchange rate changes on cash 22,000 3,000 -
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (262,000) (2,456,000) 3,620,000
Cash and cash equivalents at beginning of period 2,200,000 4,656,000 1,036,000
----------- ----------- -----------
Cash and cash equivalents at end of period $1,938,000 $2,200,000 $4,656,000
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to the consolidated financial statements.
33
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered recurring losses and has an accumulated deficit
of $60,162,000 as of December 31, 1997. Management has reduced the Company's
workforce and plans to continue to further reduce expenditures. Management
believes that such reductions, and funds expected to be generated from
operations, will be sufficient to meet its expected short-term needs for
working capital. However, the Company's ability to continue operations
without additional capital is dependent upon, among other factors, the
Company's ability to sustain revenues from its existing customer base and to
sell new systems, the continued forebearance of the Company's lenders, and
the outcome of the litigation against the Company which allege violations of
the federal securities law (see Note 13). There can be no assurance that
sufficient cash flows will be generated by the Company to avoid the further
depletion of its working capital or that the outcome of the litigation will
not have a material adverse impact on the Company's operations. Accordingly,
management intends to obtain debt or equity 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
The Company develops, markets and supports a suite of object-oriented,
client/server document management software products. These products enable
customers in a broad range of industries to effectively and efficiently manage,
share and distribute critical business information, expertise and other
intellectual capital.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
FOREIGN CURRENCY
The functional currency of the Company's United Kingdom subsidiary is
pounds sterling. Assets and liabilities are translated into U.S. dollars at
end-of-period exchange rates. Revenues and expenses are translated at average
exchange rates in effect for the period. Net currency exchange gains or losses
resulting from such translation are excluded from net income and accumulated in
a separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions, which are not significant, are included in the
Consolidated Statement of Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and also
requires disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates made by management include realizability of deferred
income tax assets, capitalized software costs, valuation of stock issued in
acquisitions, allowance for doubtful accounts and reserves for excess or
obsolete inventory.
34
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company's revenues are derived from sales of its document management
systems that are primarily composed of software and services, including
maintenance, training and consulting services, and third party hardware. The
Company recognizes revenue in accordance with Statement of Position 91-1
"Software Revenue Recognition." Software license and third party hardware
revenues are recognized upon shipment of the product if no significant vendor
obligations remain and collection is probable. In cases where a significant
vendor obligation exists, revenue recognition is delayed until such obligation
has been satisfied. Annual maintenance revenues, which consist of ongoing
support and product updates, are recognized on a straight-line basis over the
term of the contract. Payments received in advance of performance of the
related service for maintenance contracts are recorded as deferred revenue.
Revenues from training and consulting services are recognized when the services
are performed and adequate evidence of providing such services is available.
Contract revenues for long term contracts or programs requiring specialized
systems are recognized using the percentage-of-completion method of
accounting, primarily based on contract costs incurred to date compared with
total estimated costs at completion. Provisions for anticipated contract
losses are recognized at the time they become known.
Contracts are billed based on the terms of the contract. There are no
retentions in billed contract receivables. Unbilled contract receivables relate
to revenues earned but not billed at the end of the period. Billings in excess
of costs incurred and related earnings are included in current liabilities.
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 will be
required to adopt the provisions of SOP 97-2 for transactions entered into
on or after January 1, 1998. SOP 98-4 is effective as of March 31, 1998. The
adoption may, in certain circumstances, result in the deferral of software
license revenues that would have been recognized upon delivery of the related
software under preceding accounting standards. In response to SOP 97-2, the
Company will likely change its business practices and, consequently, at this
time the Company cannot quantify the effect that SOP 97-2 will have to its
operating results, financial position or cash flows.
FAIR VALUE OF FINANCIAL INVESTMENTS
It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair values.
SHORT TERM INVESTMENTS
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of December 31, 1997, the
Company had $133,000 in debt securities which have a maturity date of one year
or less. The Company has classified its debt securities as held to maturity and
records such securities at amortized cost. As of December 31, 1996, the
Company's investments consisted of time deposits which are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Unrealized gains and losses were not significant in 1997.
CONCENTRATION OF CREDIT RISK
The Company provides products and services to customers in a variety of
industries worldwide, including petrochemicals, utilities, manufacturing and
transportation. Concentration of credit risk with respect to trade receivables
is limited due to the geographic and industry dispersion of the Company's
customer base.
INVENTORY
Inventory consists of parts, supplies and subassemblies primarily used in
maintenance contracts which service the Company's hardware products sold in
prior years. Inventory is stated at the lower of cost or market
35
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
value. Cost is determined using the first-in, first-out (FIFO) method. As of
December 31, 1997 and 1996, the Company's reserve against excess quantities
totaled $511,000 and $552,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated by the
straight-line method over useful lives of two to seven years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of their useful life or the term of the related lease. Expenditures for
ordinary repairs and maintenance are expensed as incurred while major additions
and improvements are capitalized.
GOODWILL
Goodwill represents the excess of cost of purchased businesses over the
fair value of tangible and identifiable intangible net assets acquired at the
date of acquisition. Goodwill is amortized over its estimated useful life of
seven years. Accumulated amortization of goodwill was $1,745,000 and $892,000
at December 31, 1997 and 1996, respectively. The related amortization expense
was $853,000, $746,000 and $66,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE
Software development and purchased software costs are capitalized when
technological feasibility and marketability of the related product have been
established. Software development costs incurred solely in connection with a
specific contract are charged to cost of revenues. Capitalized software costs
are amortized on a product-by-product basis, beginning when the product is
available for general release to customers. Annual amortization expense is
calculated using the greater of the ratio of each product's current gross
revenues to the total of current and expected gross revenues or the straight
line method over the estimated useful life of three to four years. Accumulated
amortization of capitalized software costs was $1,352,000 and $776,000 at
December 31, 1997 and 1996, respectively. The related amortization expense was
$712,000, $614,000 and $325,000 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company evaluates the carrying value of unamortized
capitalized software costs at each balance sheet date to determine whether any
net realizable value adjustments are required.
In 1997, the Company wrote off $190,000 of certain software development
costs related to products for which costs were deemed to be unrecoverable due
to the future product direction of the Company. In 1995, the Company wrote-off
$1,664,000 as a result of the Company's plan to accelerate the introduction
of its next generation of software (see Note 3).
DEFERRED DEBT ISSUANCE COSTS
Debt issuance cost related to the Subordinated Debt (see Note 5) is recorded at
cost and is being amortized over 5 years using the straight-line method which is
considered to approximate the effective interest rate method. Accumulated
amortization and amortization expense was $34,000 in 1997.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets, when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future net cash flows is less than the carrying
amount of the asset.
36
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss and basic and diluted net loss per share as if the
fair value-based method had been applied in measuring compensation expense.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the change during the year in the deferred
income tax asset or liability. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be "more
likely than not" realized in the future based on the Company's current and
expected operating results.
NET INCOME (LOSS) PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), "Earnings per Share," for fiscal 1997 and retroactively restated
all prior periods to conform with FAS 128 as required. Basic net 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.
REVERSE STOCK SPLIT
In October 1996, the shareholders of the Company approved an amendment to
the Company's Articles of Incorporation to effectuate a 1-for-2 reverse stock
split of all outstanding shares of common stock of the Company. All references
in the Consolidated Financial Statements and in these notes have been restated
to reflect the split.
STATEMENT OF CASH FLOWS
Cash and cash equivalents are comprised of cash on hand and short-term
investments with original maturities of less than 90 days.
In 1995, cash and non-cash investing and financing activities relating to
the acquisition of Trimco Group plc (Note 3) were as follows:
Purchased research and development $ 10,595,000
Fair market value of assets acquired, excluding cash 8,195,000
Liabilities assumed (5,046,000)
Common stock issued (6,564,000)
Note payable issued (1,000,000)
Accrued acquisition costs (587,000)
------------
Cash paid for acquisition of Trimco $ 5,593,000
------------
------------
37
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
Supplemental cash flow information:
Interest paid $ 294,000 $ 75,000 $ 86,000
---------- ---------- ----------
---------- ---------- ----------
Schedule of noncash financing activities:
Conversion of Preferred Stock and note payable
to Common Stock $ - $6,235,000 $ -
---------- ---------- ----------
---------- ---------- ----------
Indemnification obligations applied against
notes payable to former Optigraphics shareholders $ - $ - $ 100,000
---------- ---------- ----------
---------- ---------- ----------
Accretion of dividends on mandatorily
redeemable convertible preferred stock $ 29,000 $ - $ -
---------- ---------- ----------
---------- ---------- ----------
NOTE 3 - ACQUISITIONS AND RESTRUCTURING:
TRIMCO GROUP PLC:
On December 27, 1995, the Company entered into a Sale and Purchase
Agreement to acquire all of the outstanding stock of Trimco Group plc ("Trimco")
for total consideration of $14,165,000 before acquisition costs of $630,000.
The purchase price was comprised of $5,550,000 in cash, 857,394 shares of the
Company's common stock with a valuation of $6,564,000 and a convertible note
payable having a total principal amount of $1,000,000 due September 27, 1996.
The purchase price also included obligations assumed which were paid to Trimco
employees in connection with the acquisition, consisting of cash of $1,051,000.
During the third quarter of 1996, the Company completed the allocation of the
purchase price initially made at the time of the Trimco acquisition based on
preliminary information, which resulted in a decrease in goodwill and an
increase in purchased technology of $127,000. During 1996, the Company incurred
additional costs associated with the Trimco acquisition, which resulted in an
increase in goodwill of $900,000. The increase was due primarily to the
settlement of a contract dispute associated with certain claims on Trimco
projects performed in 1995, which resulted in a payment of $432,000 in September
1996. The additional goodwill is being amortized over the remaining useful life
of the goodwill.
The acquisition was accounted for using the purchase method. A portion of
the purchase price relates to research and development projects that Trimco had
undertaken, resulting in a charge of $10,595,000 to the Company's operations.
The technological feasibility of acquired technology had not yet been
established at the date of acquisition and the technology had no future
alternative uses. The Company anticipates expending a significant portion of
its own development resources on the completion of this technology for
anticipated new product offerings. The excess of the purchase price over the
fair value of the tangible and identifiable intangible assets acquired (after
allocation of the purchased research and development) totaled $5,413,000 which
was recorded as goodwill. The goodwill is being amortized over its estimated
useful life of seven years. Trimco's operating results have been included in
the consolidated financial statements from the date of acquisition.
The Company also reduced its forecast for future sales of certain software
development and purchased software costs. These costs were deemed not to be
recoverable due to the Company's plan to accelerate the introduction of its next
generation of software products as a result of the greater development resources
now available. In addition, the costs of certain software development tools
which will not be utilized in the development of the next generation of software
products and certain software products to be replaced were also
38
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
written off to net realizable value. Included in the Company's operating
results is a $1,664,000 charge related to these write offs.
The following unaudited pro forma summary presents the consolidated results
of operations as if the Trimco acquisition had occurred on January 1, 1995,
after giving effect to certain adjustments, including amortization of goodwill
and interest expense on the convertible note payable. The pro forma results
have been prepared for comparative purposes only and do not purport to indicate
the results of operations which may have actually occurred had the combination
been in effect during the periods presented, or which may occur in the future.
The pro forma results are as follows:
(Unaudited)
(000's except per share data)
For the year ended December 31, 1995
------------------------------------
Total revenue $20,752
Net loss $(1,117)
Basic and diluted net loss per share $ (.14)
Shares used in per share calculation 7,874
39
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - BALANCE SHEET INFORMATION:
December 31,
----------------------------
1997 1996
---- ----
RECEIVABLES, NET:
Billed receivables $3,111,000 $4,297,000
Unbilled receivables 219,000 924,000
Less allowance for doubtful accounts (285,000) (171,000)
---------- ----------
$3,045,000 $5,050,000
---------- ----------
---------- ----------
PROPERTY AND EQUIPMENT, NET:
Computer equipment $6,269,000 $5,640,000
Machinery and equipment 549,000 566,000
Furniture and fixtures 594,000 587,000
Leasehold improvements 548,000 466,000
---------- ----------
7,960,000 7,259,000
Less accumulated depreciation
and amortization (5,690,000) (5,103,000)
---------- ----------
$2,270,000 $2,156,000
---------- ----------
---------- ----------
ACCRUED LIABILITIES:
Advance from customer $ 433,000 $ -
Employee compensation and related expenses 568,000 432,000
Accrued vacation 293,000 217,000
Sales and Vat taxes payable 253,000 250,000
Accrued loss on office closure 42,000 198,000
Other 1,169,000 589,000
---------- ----------
$2,758,000 $1,686,000
---------- ----------
---------- ----------
OTHER LONG TERM LIABILITIES:
Accrual for unfavorable leases assumed $ - $ 482,000
Accrued loss on office closure 98,000 142,000
Other 75,000 139,000
---------- ----------
$ 173,000 $ 763,000
---------- ----------
---------- ----------
NOTE 5 - NOTES PAYABLE AND SUBORDINATED DEBT:
In August 1997, the Company's United Kingdom subsidiary renewed an
overdraft facility with a bank with interest calculated at 2.0% per annum
over the bank's base rate (9.25% and 8.5% at December 31, 1997 and 1996,
respectively). The facility is payable on demand. At December 31, 1997 and
1996, $430,000 and $510,000, respectively, was outstanding. As of December
31, 1997 $230,000 was unused on the facility. 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 June 1997, the Company issued a five year, 11.5% subordinated debenture
with quarterly interest payments for gross proceeds of $3,000,000. In
conjunction with the debt, the Company granted warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $6.00 per share
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.
40
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 will be ascribed, if
any. As of December 31, 1997 the Company was in violation of certain
covenants contained in the subordiated debenture agreement. The Company
obtained a waiver of such violations in May 1998 which extends for one year.
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 December 31, 1997, $574,000 was outstanding and
$793,000 was unused on these facilities. At December 31, 1996, $1,403,000
was outstanding and $368,000 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% (8.80% and 8.91% at December 31, 1997 and
1996, 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.
At December 31, 1995, the Company had an outstanding payable for cash
advanced by a bank which acted as paying agent for the notes due to former
Optigraphics shareholders having a principal balance of $1,634,000 payable on
demand. The notes, which had an original maturity of September 1995 and
provided for interest payable quarterly at 6% per annum, were issued as part of
the total consideration paid in connection with the acquisition of Optigraphics
Corporation. The notes were paid in full in January 1996.
At December 31, 1995, the Company had an outstanding convertible note in
connection with the acquisition of Trimco having a principal balance of
$1,000,000 payable at 7% per annum, due on September 27, 1996. The note was
convertible into common stock at a rate of $8.00 per share, or an aggregate of
125,000 shares. The note was secured by a second-priority lien on the Company's
assets, subject to the first-priority lien held by the lender in connection with
the Company's existing revolving loan agreement. In February 1996, the note
was converted into 125,000 shares of the Company's common stock, and no
further obligations remain under the note.
Maturities of long-term debt for each of the five years after December 31,
1997 are as follows:
Year ending
December 31,
------------
1998 $ 730,000
1999 200,000
2000 74,000
2001 -
2002 3,000,000
------------
$ 4,004,000
------------
------------
41
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS
For the years ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Net Loss Used:
Net loss $ (8,439,000) $(2,448,000) $(11,830,000)
Accretion of dividends on mandatorily
redeemable convertible preferred stock (176,000)
------------ ----------- ------------
Net loss used in computing basic and diluted net loss
per share $(8,615,000) $(2,448,000) $(11,830,000)
------------ ----------- ------------
------------ ----------- ------------
Shares Used:
Weighted average common shares outstanding
used in computing basic and diluted net loss per
common share 9,585,000 9,250,000 7,026,000
------------ ----------- ------------
------------ ----------- ------------
Weighted average employee stock options to acquire 250,000, 235,000
and 257,000, respectively, were outstanding in fiscal 1997, 1996 and 1995,
respectively, but were not included in the computation of diluted earnings
per share because the effect was antidilutive. In addition, at December 31,
1997, 1996 and 1995, 3,000, 100,000 and 172,500 shares, respectively, of
convertible perferred stock were also excluded from the computation of
diluted earnings per share because the effect was antidilutive. At December
31, 1995, the Company's convertible note was also excluded from the
computation of diluted earnings per share because the effect was
antidilutive.
NOTE 7 - CONVERTIBLE PREFERRED STOCK
In June 1997, the Company issued 3,000 shares of its Series D
Convertible Preferred Stock ("the Series D Preferred Stock") for gross
proceeds of $3,000,000. The Series D Preferred Stock bears a dividend of
11.5% per annum and is convertible into the Company's common stock at a price
of $6.00 per share subject to reset, as defined in the preferred stock
agreement. As of March 1998 the Company is 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. 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 5) 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 acrued 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 April 1996, the Company issued 100,000 shares of its Series C
Convertible Preferred Stock in an offshore private placement to a purchaser
who is not a resident of the United States. The Company received gross
proceeds of $2,000,000. In June 1996, 37,500 shares of Series C Preferred
Stock were converted into 72,726 shares of common stock. In July 1996, the
remaining 62,500 shares of Series C Preferred Stock plus accrued dividends
were converted into 163,274 shares of common stock.
42
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In December 1995, the Company issued 172,500 shares of its Series B
Convertible Preferred Stock for gross proceeds of $3,450,000. In February 1996,
the 172,500 shares of Series B Preferred Stock were converted into 406,617
shares of common stock.
NOTE 8 - UNIT OFFERING:
In December 1991, the Company issued common stock and warrants through a
unit offering. The Company received net proceeds of approximately $2,600,000
upon issuing 750,000 units at a unit price of $4.25. In January 1992, the
underwriter exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. In connection with this
offering, the underwriter received warrants to purchase 75,000 units at $5.10
per unit for a period of four years commencing one year from the date of the
offering. In November 1995, the underwriter exercised its option to purchase
the 75,000 units for net proceeds of $382,000. Also in 1995, warrants were
exercised for 459,446 shares of common stock for net proceeds of $3,848,000.
NOTE 9 - COMMON STOCK OPTIONS:
At December 31, 1997 and December 31, 1996, the Company had two stock-based
compensation plans (the "Plans"), which are described below. The Company
applied Accounting Principles Board No. 25 and related Interpretations in
accounting for its plans. No compensation cost was recognized for its
employee stock option grants, which were fixed in nature, as the options were
granted at fair market value. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under the plans consistent with the method of
Financial Accounting Standards Board Statement No. 123, the Company's net
loss and pro forma net loss per share would have been adjusted to the pro
forma amounts indicated below:
For the year ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Net loss used in computing net loss per share
As reported $(8,615,000) $(2,448,000) $(11,830,000)
Pro forma (10,060,000) (3,022,000) $(12,285,000)
Basic and diluted net loss per share
As reported (.90) (.26) (1.68)
Pro forma (1.05) (.33) (1.75)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
1997 1996 1995
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 78% 68% 65%
Risk-free interest rate 6.4% 6.2% 6.7%
Expected lives (years) 5 4 4
In April 1996, the Company adopted its 1996 Stock Incentive Plan (the "1996
Plan"). The 1996 Plan is administered by either the Board of Directors or a
committee designated by the Board to oversee the plan. Under the Company's 1996
Stock Incentive Plan, the maximum number of shares of Common Stock that may be
issued pursuant to awards granted is 625,000 of which there is 623,750 remaining
authorized shares subject to grants but unissued. Under the Company's 1987
Stock Option Plan, the maximum number of shares of
43
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Common Stock issued were 1,200,000 of which there are no remaining shares
available for grant. There are 277,563 remaining authorized shares subject to
grants but unissued.
The option vesting period for the Plans is determined by the Board of
Directors or a Stock Option Committee and usually provides that 25% of the
options granted can be exercised 90 days from the date of grant, and thereafter,
those options become exercisable in additional cumulative annual installments of
25% commencing on the first anniversary of the date of grant. Options granted
are generally due to expire upon the sooner of ten years from date of grant,
thirty days after termination of services other than by reason of convenience of
the Company, disability or death, three months after disability, or one year
after the date of the option holder's death. The option exercise price is equal
to the fair market value of the common stock on the date of grant.
Options granted to employees under the Plans may be either incentive stock
options or nonqualified options. Only nonqualified options may be granted to
nonemployee directors.
Year Ended December 31,
1997 1996 1995
------------------------------ ---------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding at beginning of year 445,212 $5.12 656,775 $2.24 594,250 $ .31
Options granted 532,751 5.80 449,500 6.96 281,400 5.23
Options exercised (54,719) 3.52 (316,875) 4.01 (213,200) .88
Options forfeited (281,431) 6.00 (344,188) 7.03 (5,675) 2.08
--------- -------- --------
Outstanding at end of year 641,813 5.43 445,212 5.12 656,775 2.24
--------- -------- --------
--------- -------- --------
Options exercisable at end of year 276,887 166,950 380,412
Weighted average fair value of
options granted during the year $4.02 $6.36 $3.73
The following tables summarizes information about employee stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding at Remaining average Exercisable at average
Exercise prices December 31, 1997 contractual life exercise price December 31, 1997 exercise price
--------------- ----------------- ---------------- -------------- ----------------- --------------
$2.76 to $3.50 86,188 1.27 years $3.33 82,438 $3.33
$4.13 to $6.13 413,125 6.74 years $5.55 158,574 $5.69
$6.25 to $7.88 142,500 9.00 years $6.38 35,875 $6.38
------- --------
$2.76 to $7.88 641,813 6.51 years $5.43 276,887 $5.08
------- --------
------- --------
44
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES:
Deferred tax assets and liabilities are comprised of the following at
December 31:
1997 1996
----------- -----------
Deferred tax liability:
Purchased technology $ (124,000) $ (262,000)
----------- ------------
Deferred tax assets:
Net operating loss carryforwards 15,826,000 13,522,000
Research and development costs 1,276,000 1,946,000
Depreciation and amortization 18,000 159,000
Inventory 497,000 451,000
Deferred revenue 202,000 283,000
Accruals 149,000 468,000
Other 679,000 695,000
----------- ------------
Total deferred tax assets 18,647,000 17,524,000
----------- ------------
Net deferred tax assets 18,523,000 17,262,000
Valuation allowance (18,523,000) (17,262,000)
----------- ------------
Deferred taxes $ - $ -
----------- ------------
----------- ------------
The Company has recorded a valuation allowance amounting to the entire net
deferred tax asset balance due to its lack of a history of consistent earnings,
possible limitations on the use of carryforwards, and the expiration of certain
of the net operating loss carryforwards which gives rise to uncertainty as to
whether the net deferred tax asset is realizable.
In connection with the acquisition of Trimco, the Company acquired $926,000
in deferred tax assets of which $626,000 was provided as a valuation allowance.
In June 1997, the $300,000 tax asset was realized and a reduction to goodwill
was recorded. In the event that the remaining tax benefits acquired in the
Trimco acquisition are realized, such benefits will be used first to reduce
any remaining goodwill and other intangible assets related to the
acquisition. Once those assets are reduced to zero, the benefit will be
included as a reduction of the Company's income tax provision.
The Company has net operating loss carryforwards of $40,549,000 and
$10,239,000 for federal and state tax purposes, respectively, which expire
over the years 1998 through 2010. Net operating losses acquired from
Optigraphics are limited to $8,000,000 offset against that entity's future
taxable income, subject to an approximate $500,000 annual limitation. In
addition, if certain substantial changes in the Company's ownership should
occur, there would be a limitation on the amount of the consolidated net
operating loss carryforwards and tax credits which can be utilized. The
Company has investment and research activity credit carryforwards aggregating
$500,000, which will substantially expire in the years 2000 through 2005.
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION:
The Company has one business segment which consists of the development and
sale of a suite of object-oriented, multi-tier client/server document management
software products. One customer accounted for 12% of the Company's total
revenues in 1996.
In 1995 the Company operated principally in the United States and
international revenues were less than 10% of the Company's revenues. Revenues
for 1997 and 1996 by customer location are as follows:
45
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
------ ------
United States $9,922,000 $12,778,000
Europe 6,599,000 5,450,000
Other International 1,252,000 1,321,000
----------- -----------
$17,773,000 $19,549,000
----------- -----------
----------- -----------
Subsequent to the acquisition of Trimco in December 1995, the Company's
primary operations for 1997 and 1996 were conducted from the United States and
Europe.
Segment and operations information by geographic location for the year
ended December 31, 1997 follows:
United Corporate
States Europe Research & Development Consolidated
------ -------- ---------------------- -------------
Net sales $10,861,000 $6,912,000 - $17,773,000
Operating loss (1,726,000) (2,494,000) $(4,155,000) (8,375,000)
Identifiable assets 7,784,000 8,052,000 - 15,836,000
Segment and operations information by geographic location for the year
ended December 31, 1996 follows:
United Corporate
States Europe Research & Development Consolidated
------ -------- ---------------------- -------------
Net sales $12,295,000 $7,254,000 - $19,549,000
Operating income (loss) 1,512,000 (571,000) $(3,363,000) (2,422,000)
Identifiable assets 10,113,000 8,147,000 - 18,260,000
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 12 - COMMITMENTS:
The Company leases its principal facilities under a long-term
operating lease which expires in March 2001 and includes rent escalations of
approximately 4% per annum. The Company also has a long-term operating lease
for another facility that includes rent escalations not to exceed 4% in any
year. The Company subleased this other facility in 1996 and recognized a
loss for the difference in the lease and sublease rate along with other costs
associated with the office closure. The leases expire in April 2001. The
Company recognizes rental expense on a straight line basis over the term of
the leases.
The Company assumed leases for certain facilities leased by Trimco
for which no future benefit is anticipated. The accrual for unfavorable
leases assumed relates to a liability for the minimum lease payments less
estimated sublease rental income on these leases. In December 1997, the
Company subleased one of the leases under a noncancellable agreement which ends
in August 2006 for an amount equal to the Company's future obligation under
the lease, resulting in a $266,000 increase in other income. The Company's
United Kingdom subsidiary leases a facility for a term through March 2001
with an option to extend the lease for an additional five years. The Company
also leases a facility in Florida under a lease which expires in 2002.
46
ALTRIS SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under operating lease agreements, net of
noncancellable sublease payments of approximately $920,000, at December 31, 1997
are as follows:
Operating
Lease
-----------
1998 $ 533,000
1999 478,000
2000 473,000
2001 129,000
2002 17,000
------------
Total minimum lease payments $1,630,000
------------
------------
Rent expense under operating leases was $717,000, $779,000 and $479,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 13 - SUBSEQUENT EVENTS
LITIGATION
During March 1998 through May 1998, six complaints alleging violations
of the federal securities laws were filed against the Company and certain of
its present and former officers and directors. The complaints are class
actions filed by individuals who allege that they purchased the Company's
common stock during specified periods. The complaints allege that the
Company and the individual defendants issued false and misleading statements
in the Company's filings with the Securities and Exchange Commission and
other public statements. Management is unable to determine whether the
outcome of these complaints will have a material impact on its financial
position, results of operations and cash flows.
RESIGNATION OF CEO
In April 1998, the Company and the then Chief Executive Officer (the
"Former CEO") entered into a separation agreement whereby the Former CEO
resigned. Under the agreement, the Former CEO will be paid $215,000, plus
benefits, over a one year period, in exchange for consulting services.
RESTRUCTURING
During the first four months of 1998, the Company restructured its
operations and reduced its payroll cost (the Company's longest cost element)
by approximately 25% from the level prevailing at the end of 1997. In addition,
the Company has made further additions to other expenditures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion sets forth certain information
concerning the Company's current directors and executive officers:
Name Age Position
- ------------------------ ---- ---------------------------------------
Roger H. Erickson 41 Chief Executive Officer and Director
D. Ross Hamilton 60 Director
Michael J. McGovern 68 Director
Larry D. Unruh 46 Director
Norwood H. Davis, Jr. 58 Director
Martin P. Atkinson 51 Director
David Chu 42 Vice President, Engineering
Steven D. Clark 46 Vice President, Sales
John W. Low 41 Chief Financial Officer and Secretary
Mr. Erickson was appointed the Company's Chief Executive Officer in April
1998, a position which he previously held from October 1991 to August 1993. In
addition, Mr. Erickson was appointed as a Director of the Company in 1998, a
position which he previously held from July 1990 to June 1995. Mr. Erickson has
served the Company in various other capacities, including as (i) Vice President,
Strategic Partners, from July 1997 to April 1998, (ii) Vice President,
Operations, from June 1996 to July 1997, (iii) Vice President, Worldwide Channel
Sales, from April 1995 to February 1996, (iv) Vice President, Alliances and
General Manager, PDM Business Unit, from February 1996 to June 1996, (v)
Executive Vice President, Marketing and Sales, from September 1993 to March
1995 and (vi) Vice President, Engineering, from June 1990 to October 1991. From
1984 until March 1990, Mr. Erickson served the Company in several positions
including Senior Systems Engineer and Director of Technical Projects. Mr.
Erickson earned a M.S. degree in Computer Science from the University of
California, Santa Barbara in 1982 and a B.A. degree in Mathematics from Westmont
College in 1978.
Mr. Hamilton has been a Director of the Company since June 1994. He served
as Chairman of the Board of the Company from January 1997 through June 1997.
Since 1983 Mr. Hamilton has served as President of Hamilton Research, Inc., an
investment banking firm. Mr. Hamilton currently serves as a director of Luther
Medical Products, Inc., a medical device manufacturer. Mr. Hamilton received a
B.S. degree in Economics from Auburn University in 1961.
Mr. McGovern has served as a Director of the Company since he founded
the Company in February 1981, and served as the Company's Chairman and Chief
Executive Officer from its inception until December 1987. Mr. McGovern was a
founder of Autologic, Inc. in 1968, where he was Vice President of
Engineering in charge of developing computer driven photo typesetters for the
newspaper and painting industries. Mr. McGovern also serves as a director of
Qtel, Inc. (since March 1997) and as a director of Alpha Data Tech. (since
April 1997). He received a B.S.E.E. degree from City University of New York
in 1952 and an M.S.E.E. degree from Arizona State University in 1959.
Mr. Unruh has served as a Director of the Company since May 1988. He is a
partner of Hein & Associates LLP, certified public accountants, and has been its
Managing Tax Partner since 1982. Mr. Unruh currently serves as a director of
Basin Exploration, Inc., an oil exploration and development company, and also
serves as a director of LK Business Services Inc., a specialty automobile
lubricant manufacturer. Mr. Unruh received a B.S. degree in Accounting from the
University of Denver in 1973.
Mr. Davis has served as a Director of the Company since December 1996. Mr.
Davis has served as the President and Chief Executive Officer of Trigon
Healthcare, Inc. since 1981, and as Chairman of
48
the Board since 1995. He has been a director of Trigon Healthcare, Inc.
since 1975. Mr. Davis is a director of Signet Banking Corporation Hilb,
Rogal & Hamilton Co. and First Union Corporation. He received a B.S. degree
from Hampden-Sydney College in 1963 and an LL.B. (law) degree from the
University of Virginia in 1966.
Mr. Atkinson has served as a Director of the Company since 1997. Mr.
Atkinson presently runs a consulting firm based in Kent, England that advises
middle-market companies on banking and corporate finance matters. Prior to
establishing his consulting firm, Mr. Atkinson was employed by Lloyds Bank for
28 years until his retirement from there (at the senior executive level) in
December 1996. While at Lloyds, Mr. Atkinson was the Head of Risk Control of
Lloyds Merchant Bank Limited, a Director of Lloyds' Capital Markets Group, where
he was responsible for arranging several multi-million pound syndicated loans,
and from 1992 to 1996, he was responsible for Lloyds' middle-market activities
in certain counties in England. Mr. Atkinson is an Associate of the Institute
of Bankers, England. He received a law degree from Nottingham University in
England in 1968.
Mr. Chu was appointed Vice President, Engineering in April 1998. Since
joining the Company in February 1997, Mr. Chu served as Director U.S.
Software Engineering until April 1998. From 1995 to 1997, Mr. Chu was an
independent consultant for Performance Solutions Group, a technical
consulting organization. From 1984 to 1995, Mr. Chu was with Computer
Associates International most recently as Assistant Vice President of
Research and Development. Mr. Chu holds triple certifications as a Microsoft
Certified Systems Engineer, Solutions Developer and Trainer.
Mr. Clark was appointed Vice President, Sales in October 1997. Previously,
Mr. Clark had served as Vice President North American Sales since January 1997.
From 1994 through the end of 1996, Mr. Clark was Director of U.S. Sales. From
1992 to 1994, Mr. Clark served as the Vice President of West Coast Operations at
PRC, a systems integration firm. From 1987 to 1992, Mr. Clark was Director of
Marketing for Optigraphics Corporation. From 1983 to 1987, he was Vice
President of Sales and Marketing at Energy Images in Boulder, Colorado. From
1975 to 1983, Mr. Clark held several positions with Dun & Bradstreet Petroleum
Information. Mr. Clark earned a B.A. degree in Geography from the University of
Colorado in 1974.
Mr. Low has served as Chief Financial Officer and Secretary since June
1990. Previously, Mr. Low had served as Corporate Controller since joining the
Company in August 1987. From 1980 until joining the Company, Mr. Low was with
Price Waterhouse LLP, most recently as a Manager working with middle-market and
growing companies. Mr. Low, who is a certified public accountant, earned a B.A.
degree in Economics from the University of California, Los Angeles in 1978.
All directors are elected annually and serve until the next annual meeting
of shareholders and until their successors have been elected and qualified. Mr.
Davis has advised the Company he does not intend to stand for reelection to the
Board of Directors.
All executive officers hold office at the discretion of the Board of
Directors.
49
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than 10% of the
Company's common stock to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission (the "SEC").
Executive officers, directors and 10% shareholders are required by the SEC to
furnish the Company with copies of all Forms 3, 4 and 5 that they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file a Form 5 for specified fiscal years, and other than
with respect to D. Ross Hamilton, a member of the Board of Directors who did not
timely file a Form 4 for an acquisition of the Company's Common Stock in
December 1997, the Company believes that all of its executive officers,
directors and greater than 10% shareholders have complied with all of the filing
requirements applicable to them with respect to transactions during 1997.
50
COMPENSATION OF DIRECTORS
Each director, other than directors who are also employees of the Company
or are precluded from accepting a fee by their employers, receives a $5,000
annual fee plus a $1,000 meeting fee for four paid meetings a year. In addition,
each director is reimbursed for all reasonable expenses incurred in connection
with attendance at such meetings. Directors who are employees of the Company
are not compensated for serving as directors.
During 1997, Mr. Hamilton assisted the Company in raising capital through a
$6 million private placement of both equity and debt securities. The
transaction was completed in June 1997 and the Company paid Mr. Hamilton
$120,000 for his services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, the Compensation Committee of the Board of Directors was comprised
of four members, Messrs. McGovern, Hamilton and Unruh and Michael Comegna (who
resigned as a Director in April 1998), none of whom is or was an employee or
officer of the Company in 1997. No executive officer of the Company has served
as a member of the Board of Directors or Compensation Committee of any company
in which Messrs. McGovern, Hamilton, Unruh or Comegna is an executive officer.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual
and long-term compensation for services rendered in all capacities to the
Company for the three years ended December 31, 1997 of (i) the Company's Chief
Executive Officer during 1997 and (ii) the four other most highly compensated
executive officers of the Company having compensation of $100,000 or more during
1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------
LONG-TERM
OTHER COMPENSATION
ANNUAL AWARDS--
COMPENSATION STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (# SHARES)
- ----------------------------- ---- ---------- -------- ------------- --------------
Roger H. Erickson 1997 $174,708 $ 9,000 - -
Chief Executive Officer(2) 1996 185,427 - - 25,000
1995 138,252 - - -
Jay V. Tanna 1997 $215,000 - - 75,000
Former President and Chief 1996 205,865 - - 112,500
Executive Officer(3) 1995 - - - -
Steven D. Clark 1997 $168,462 $25,000 - 40,000
Vice President Sales(4) 1996 136,355 - $66,719 -
1995 83,923 - - 5,000
John W. Low 1997 $149,639 - - -
Chief Financial Officer 1996 142,535 - - 25,000
and Secretary 1995 131,904 - - 10,000
Tim A. Wright 1997 $134,666 $13,494 - 30,000
Former Managing Director, 1996 83,026 - - 2,500
UK Operations(5) 1995 - - - -
- -----------------------
50
(1) Excludes compensation in the form of other personal benefits, which for
each of the executive officers did not exceed the lesser of $50,000 or 10%
of the total annual salary and bonus reported for each year.
(2) Mr. Erickson became President and Chief Executive Officer of the Company
effective April 1998. During 1997 Mr. Erickson served as Vice President,
Operations and Vice President Strategic Partners.
(3) Mr. Tanna became President and Chief Executive Officer of the Company in
April 1996 and resigned from that position effective April 16, 1998. The
75,000 options granted to Mr. Tanna in 1997 were subsequently returned to
the Company and cancelled.
(4) Mr. Clark was appointed an executive officer in January 1997. The bonus
paid in 1997 related to services provided in 1996 as Director of U.S.
Sales. The other annual compensation paid in 1996 related to sales
commissions.
(5) Mr. Wright resigned his employment with the Company in February 1998. The
bonuses paid in 1997 related to services provided for Mr. Wright in 1996 as
Deputy Managing Director of U.K. Operations. No information is presented
for 1995 as Mr. Wright commenced employment with the Company in 1996.
51
OPTION GRANTS IN 1997
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1997:
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM (2)
OPTIONS IN PRICE EXPIRATION -------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---------------- -------------- ----------- --------- ----------- --------- ----------
Roger H. Erickson - - - - - -
Jay V. Tanna 75,000 14% $6.13 2/11/07 $288,523 $731,750
Steven D. Clark 30,000 6% $6.38 1/2/07 $120,126 $304,653
Steven D. Clark 10,000 2% $4.13 5/7/07 $ 25,942 $ 65,742
John W. Low - - - - - -
Tim A. Wright 30,000 6% $6.38 1/2/07 $120,126 $304,653
- ---------------------
(1) Options were granted to Mr. Tanna in February 1997, Mr. Clark in January
and May 1997, and Mr. Wright in January 1997. All such options reflected
above were granted with an exercise price equal to the closing sale price
of the Common Stock as reported on the Nasdaq National Market on the date
of grant. All grants vest 25% 90 days from the date of grant and in
additional annual installments of 25% commencing on the first anniversary
of the date of grant. The options granted to Mr. Tanna were voluntarily
returned to the Company and cancelled in December 1997.
(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of its Common Stock.
The actual value, if any, which a Named Executive Officer may realize upon
the exercise of stock options will be based upon the difference between the
market price of the Company's Common Stock on the date of exercise and the
exercise price.
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
The following table sets forth for the Named Executive Officers information
with respect to unexercised options and year-end option values, in each case
with respect to options to purchase shares of the Company's Common Stock:
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED HELD AS OF DECEMBER 31, 1997 AT DECEMBER 31, 1997 (1)
ON VALUE ----------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- ------------------- ---------- -------- ----------- -------------- ------------- --------------
Jay V. Tanna - - 56,250 56,250 - -
Roger H. Erickson - - 30,000 12,500 - -
Steven D. Clark - - 23,750 31,250 $ 2,710 -
John W. Low - - 42,500 15,000 - -
Tim A. Wright - - 8,750 23,750 - -
- ---------------
(1) Based on the closing sale price of the Company's Common Stock on the Nasdaq
National Market on December 31, 1997 of $3.03 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to shares of the Company's
Common Stock owned as of April 30, 1998 by (i) each current director; (ii) each
Named Executive Officer who is presently an employee of the Company; (iii) all
current directors and executive officers as a group; and (iv) each person who,
to the extent known to the Company, beneficially owned more than 5% of the
outstanding shares of Common Stock. Unless otherwise indicated in the footnotes
following the table, the persons as to whom the
52
information is given have sole voting and investment power over the shares shown
as beneficially owned, subject to community property laws where applicable.
NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(1)
- ------ ---------- ----------
Roger H. Erickson 81,000 *
Steven D. Clark 35,000 *
John W. Low 92,000 *
D. Ross Hamilton 184,000 1.9%
Michael J. McGovern 350,751 3.6%
Larry D. Unruh 9,297 *
Norwood H. Davis, Jr. 26,500 *
Martin P. Atkinson 5,000 *
All Current Directors and Executive Officers
as a Group (9 persons) 793,548 8.1%
- -----------------
*Less than one percent.
(1) Amounts and percentages include shares of Common Stock that may be acquired
within 60 days of April 30, 1998 through the exercise of stock options.
Such stock included in the computation of beneficial ownership is 30,000
shares for Mr. Erickson, 45,000 shares or Mr. Low, 12,500 shares for Mr.
Hamilton, 5,000 shares for Mr. McGovern, 5,000 shares for Mr. Unruh, 5,000
shares for Mr. Davis, 5,000 shares for Mr. Atkinson, and 152,500 shares for
all current directors and executive officers as a group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1998, the Company and Mr. Tanna entered into a Separation
Agreement whereby Mr. Tanna resigned his positions as Chairman of the Board,
President and Chief Executive Officer and as Director. Under the Agreement,
Mr. Tanna will act as an on-call consultant for any matters the Company may
refer to him for his input and participation. His annual compensation for
such services is $215,000 plus medical, dental and car allowance benefits.
The Separation Agreement terminates on March 31, 1999.
In March 1997, Mr. Tanna loaned the Company $300,000 at 12% on an unsecured
basis. The Company repaid the loan balance with accrued interest in July 1997.
In October 1996, the Company loaned (i) Roger H. Erickson, then Vice
President, Operations, $92,812 and (ii) John W. Low, Chief Financial Officer and
Secretary, $61,875. Each loan is at a simple interest rate of 9.25% with a
maturity date of March 31, 1997. The loans were made to Messrs. Erickson and
Low in connection with their exercise of stock options that were due to expire.
On May 15, 1998, the Company agreed, as additional compensation to Messrs.
Erickson and Low, to forgive the promissory notes of such officers. The
outstanding principal and interest payable by Messrs. Erickson and Low under
such notes were $106,196 and $70,797, respectively, as of May 15, 1998.
In 1997, Mr. Hamilton assisted the Company in raising capital through a
private placement. The transaction was completed in June 1997 and the Company
paid to Mr. Hamilton $120,000 for his services.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES, AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the years ended December
31, 1997, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended December
31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) EXHIBITS:
3.1* Registrant's Articles of Incorporation, as amended
3.2* Registrant's Bylaws, as amended
4.1* Specimen Certificate of Common Stock
4.2* Specimen Certificate of Redeemable Common Stock Purchase
Warrant
10.1* Purchase Agreement dated as of April 10, 1986, between
Registrant and Lockheed Corporation, including form of Cross
License Agreement and Shareholder Agreement
10.2* Purchase Agreement dated as of August 26, 1986, between
Registrant and Lockheed Corporation
10.3* 1987 Stock Option Plan, as amended April 27, 1994
10.4* Forms of Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement under 1987 Stock Option Plan
10.5* Amended and Restated 1996 Stock Incentive Plan
10.6* Form of Incentive Stock Option Agreement, Nonstatutory Stock
Option Agreement and Restricted Stock Agreement under
Amended and Restated 1996 Stock Incentive Plan
10.7* Form of Indemnification Agreement with officers and
directors
10.8* Warrant Agreement dated December 12, 1991 between the
Company and Security Pacific National Bank.
10.9* Sublease Agreement dated August 31, 1992 between the Company
and Unisys Corporation
54
10.10* Agreement and Plan of Merger and Reorganization dated as of
July 7, 1993 by and among the Company, AO Acquisition
Corporation and Optigraphics Corporation
10.11* Amendment No. 1 to Agreement and Plan of Merger and
Reorganization dated as of September 15, 1993 by and among
the Company, AO Acquisition Corporation and Optigraphics
Corporation
10.12* WCMA and Term Loan Agreement dated July 6, 1994 between
Optigraphics Corporation and Merrill Lynch Business
Financial Services, Inc.
10.13* Standard Industrial Lease dated April 1, 1994 between the
Company and Utah State Retirement Fund, a common trust fund
10.15* WCMA and Term Loan Agreement dated October 22, 1996 between
Altris Software, Inc. and Merrill Lynch Business Financial
Services, Inc.
10.16 Continuing Guarantee dated August 30, 1996 between Alpharel,
Inc. and Lloyds Bank Plc
10.17 Overdraft Facility and Other Facilities dated August 26,
1997 between Altris Software, Inc. and Lloyds Bank Plc
10.18* Certificate of Determination of Series D Convertible
Preferred Stock of the Company
10.19* 11.5% Subordinated Debenture due June 27, 2002 in principal
amount of $3,000,000 issued by the Altris Software, Inc. to
Sirrom Capital Corporation, d/b/a/ Tandem Capital on June
27, 1997
10.20* Convertible Preferred Stock Purchase Agreement, dated as of
June 27, 1997, by and between the Altris Software Inc. and
Sirrom Capital Corporation, d/b/a/ Tandem Capital
10.21* Debenture Purchase Agreement, dated as of June 27, 1997, by
and between Altris Software, Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
10.22* Registration Rights Agreement, dated as of June 27, 1997, by
and between Altris Software Inc. and Sirrom Capital
Corporation, d/b/a/ Tandem Capital
21 Subsidiaries of Registrant
23 Consent of Independent Accountants
27 Requirements for the Format and Input of Financial Data
Schedules
- ---------------------------
*Incorporated herein by this reference from previous filings with the Securities
and Exchange Commission.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on May 19, 1998.
ALTRIS SOFTWARE, INC.
By: /s/ Roger H. Erickson
--------------------------
Roger H. Erickson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
/s/ Roger H. Erickson
- ----------------------- Director and Chief Executive May 19, 1998
Roger H. Erickson Officer (Principal Executive Officer)
/s/ John W. Low
- ------------------------ Chief Financial Officer and Secretary May 19, 1998
John W. Low (Principal Financial and Accounting Officer)
/s/ Martin Atkinson
- ------------------------ Director May 13, 1998
Martin Atkinson
/s/ Norwood H. Davis, Jr.
- ------------------------ Director May 13, 1998
Norwood H. Davis, Jr.
/s/ D. Ross Hamilton
- ------------------------ Director May 19, 1998
D. Ross Hamilton
/s/ Michael J. McGovern
- ------------------------ Director May 19, 1998
Michael J. McGovern
/s/ Larry D. Unruh
- ------------------------ Director May 19, 1998
Larry D. Unruh
56
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALTRIS SOFTWARE, INC.
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
Charged to
Description Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
of Period Expenses Describe Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 171,000 $ 259,000 $ (145,000)(a) $ 285,000
Excess inventory reserve $ 552,000 $ 50,000 $ (91,000)(b) $ 511,000
Tax benefit reserve $ 17,262,000 $1,261,000 (c) $18,523,000
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 125,000 $ 140,000 $ (94,000)(a) $ 171,000
Excess inventory reserve $ 2,119,000 $(1,567,000)(b) $ 552,000
Tax benefit reserve $ 17,600,000 $ (338,000) $17,262,000
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 162,000 $ 35,000 $ (72,000)(a) $ 125,000
Excess inventory reserve $ 2,323,000 $ (204,000)(b) $ 2,119,000
Tax benefit reserve $ 16,300,000 $1,300,000 (c) $17,600,000
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(a) Amount written off
(b) Inventory scrapped or sold at less than cost
(c) Valuation allowance against benefit recorded
(d) Adjustment relating to tax provision or benefit expired
55