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.
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.
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.
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
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
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
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:
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
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.
- 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.
- 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
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.
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
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
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.
ITEM 2.
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.
ITEM 3.
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
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.
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.
PART II
ITEM 5.
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:
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.
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
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.
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.
ITEM 7.
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:
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.
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.
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
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
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.
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
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
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No items.
ITEM 8.
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
ALTRIS SOFTWARE, INC. CONSOLIDATED BALANCE SHEET
See accompanying notes to the consolidated financial statements.
ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying notes to the consolidated financial statements.
ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
ALTRIS SOFTWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
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.
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
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.
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:
ALTRIS SOFTWARE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
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:
ALTRIS SOFTWARE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - BALANCE SHEET INFORMATION:
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.
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:
ALTRIS SOFTWARE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RECONCILIATION OF NET LOSS AND SHARES USED IN PER SHARE COMPUTATIONS
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.
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:
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:
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
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.
The following tables summarizes information about employee stock options outstanding at December 31, 1997:
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:
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:
ALTRIS SOFTWARE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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:
Segment and operations information by geographic location for the year ended December 31, 1996 follows:
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.
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:
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
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:
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
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.
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.
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.
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
- -----------------------
(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.
OPTION GRANTS IN 1997
Shown below is information concerning grants of options issued by the Company to the Named Executive Officers during 1997:
- ---------------------
(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:
(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.
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
information is given have sole voting and investment power over the shares shown as beneficially owned, subject to community property laws where applicable.
*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.
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.
PART IV
ITEM 14.
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
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.
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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALTRIS SOFTWARE, INC.
(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