Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number: 000-49793

 


 

ALTIRIS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   87-0616516

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

588 West 400 South

Lindon, Utah 84042

(Address, including zip code, of Registrant’s principal executive offices)

 

Registrant’s telephone number, including area code: (801) 805-2400

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

There were 26,933,879 shares of the Registrant’s common stock, par value $0.0001, outstanding on November 5, 2004.

 



Table of Contents

Table of Contents

 

PART I. FINANCIAL INFORMATION     
Item 1.   Financial Statements    3
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    13
Item 3.   Quantitative and Qualitative Disclosure about Market Risk    25
Item 4.   Controls and Procedures    25
PART II. OTHER INFORMATION     
Item 1.   Legal Proceedings    27
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    27
Item 4.   Submission of Matters to a Vote of Security Holders    27
Item 5.   Other Information    27
Item 6.   Exhibits    28
Signatures    30

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

    ITEM 1. FINANCIAL STATEMENTS

 

ALTIRIS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

     September 30,
2004


    December 31,
2003


 
ASSETS                 

Currents assets:

                

Cash and cash equivalents

   $ 127,822,000     $ 61,581,000  

Available-for-sale securities

     43,568,000       77,450,000  

Accounts receivable, net of allowances of $2,077,000 and $2,195,000, respectively

     31,820,000       23,479,000  

Prepaid expenses and other current assets

     4,459,000       4,131,000  

Deferred tax asset

     1,021,000       852,000  
    


 


Total current assets

     208,690,000       167,493,000  

Property and equipment, net

     5,223,000       4,517,000  

Intangible assets, net

     23,237,000       22,951,000  

Goodwill

     16,897,000       15,698,000  

Other assets

     131,000       128,000  
    


 


Total assets

   $ 254,178,000     $ 210,787,000  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Current portion of capital lease obligations

   $ 1,009,000     $ 1,008,000  

Accounts payable

     2,541,000       2,769,000  

Accrued salaries and benefits

     9,278,000       7,220,000  

Other accrued expenses

     7,800,000       4,172,000  

Deferred revenue

     33,488,000       21,620,000  
    


 


Total current liabilities

     54,116,000       36,789,000  

Capital lease obligations, net of current portion

     914,000       818,000  

Deferred tax liability, non-current

     1,922,000       1,921,000  

Deferred revenue, non-current

     5,275,000       4,409,000  
    


 


Total liabilities

     62,227,000       43,937,000  
    


 


Commitments and contingencies (Note 5)

                

Stockholders’ equity:

                

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares designated and outstanding

     —         —    

Common stock, $0.0001 par value; 100,000,000 shares authorized; 26,853,270 and 25,983,659, shares outstanding, respectively

     3,000       3,000  

Additional paid-in capital

     191,567,000       177,185,000  

Deferred compensation

     (412,000 )     (899,000 )

Accumulated other comprehensive income

     114,000       58,000  

Retained earnings (Accumulated deficit)

     679,000       (9,497,000 )
    


 


Total stockholders’ equity

     191,951,000       166,850,000  
    


 


Total liabilities and stockholders’ equity

   $ 254,178,000     $ 210,787,000  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

ALTIRIS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2004

    2003

    2004

    2003

 

Revenue:

                                

Software

   $ 24,768,000     $ 16,598,000     $ 75,046,000     $ 44,459,000  

Services

     15,928,000       8,756,000       43,085,000       24,554,000  
    


 


 


 


Total revenue

     40,696,000       25,354,000       118,131,000       69,013,000  
    


 


 


 


Cost of revenue:

                                

Software

     292,000       445,000       839,000       794,000  

Amortization of acquired intellectual property

     1,341,000       169,000       3,409,000       466,000  

Services

     5,587,000       2,597,000       14,779,000       7,441,000  
    


 


 


 


Total cost of revenue

     7,220,000       3,211,00       19,027,000       8,701,000  
    


 


 


 


Gross profit

     33,476,000       22,143,000       99,104,000       60,312,000  
    


 


 


 


Operating expenses:

                                

Sales and marketing (exclusive of stock-based compensation of $87,000, $189,000, $263,000 and $567,000, respectively)

     15,921,000       9,677,000       46,361,000       27,004,000  

Research and development (exclusive of stock-based compensation of $16,000, $34,000, $48,000 and $102,000, respectively)

     7,916,000       6,176,000       23,573,000       17,446,000  

General and administrative (exclusive of stock-based compensation of $50,000, $98,000, $145,000 and $316,000, respectively)

     3,600,000       1,759,000       10,184,000       5,593,000  

Stock-based compensation

     153,000       321,000       456,000       985,000  

Amortization of intangible assets

     687,000       —         2,032,000       41,000  
    


 


 


 


Total operating expenses

     28,277,000       17,933,000       82,606,000       57,069,000  
    


 


 


 


Income from operations

     5,199,000       4,210,000       16,498,000       9,243,000  
    


 


 


 


Other income (expense):

                                

Interest income (expense), net

     547,000       554,000       1,364,000       1,068,000  

Other income (expense), net

     75,000       404,000       (330,000 )     1,103,000  
    


 


 


 


Other income, net

     622,000       958,000       1,034,000       2,171,000  
    


 


 


 


Income before income taxes

     5,821,000       5,168,000       17,532,000       11,414,000  

Provision for income taxes

     (2,432,000 )     (1,320,000 )     (7,356,000 )     (1,784,000 )
    


 


 


 


Net income

     3,389,000       3,848,000       10,176,000       9,630,000  
    


 


 


 


Basic net income per common share

   $ 0.13     $ 0.16     $ 0.39     $ 0.44  
    


 


 


 


Diluted net income per common share

   $ 0.12     $ 0.15     $ 0.37     $ 0.42  
    


 


 


 


Basic weighted average common shares outstanding

     26,695,000       23,556,000       26,385,000       21,788,000  

Diluted weighted average common shares outstanding

     27,840,000       24,976,000       27,591,000       23,063,000  

Other comprehensive income:

                                

Net income

   $ 3,389,000     $ 3,848,000     $ 10,176,000     $ 9,630,000  

Unrealized gain (loss) on available-for-sale securities

     146,000       (87,000 )     (84,000 )     51,000  

Foreign currency translation adjustments

     124,000       12,000       140,000       8,000  
    


 


 


 


Comprehensive income

   $ 3,659,000     $ 3,773,000     $ 10,232,000     $ 9,689,000  
    


 


 


 


 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

ALTIRIS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    

Nine Months Ended

September 30,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 10,176,000     $ 9,630,000  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     7,602,000       1,981,000  

Stock-based compensation

     456,000       985,000  

Provision for doubtful accounts and other allowances

     2,486,000       1,179,000  

Reduction of income taxes payable as a result of stock option exercises

     7,340,000       —    

Deferred income taxes

     (1,275,000 )     —    

Gain on sale of available-for-sale securities

     (7,000 )     —    

Changes in operating assets and liabilities, net of acquisitions:

                

Accounts receivable

     (10,993,000 )     (8,342,000 )

Prepaid expenses and other current assets

     (155,000 )     (935,000 )

Other assets

     (5,000 )     (11,000 )

Accounts payable

     (244,000 )     420,000  

Accrued salaries and benefits

     2,111,000       97,000  

Other accrued expenses

     2,385,000       (330,000 )

Deferred revenue

     12,736,000       6,707,000  
    


 


Net cash provided by operating activities

     32,613,000       11,381,000  
    


 


Cash flows from investing activities:

                

Purchase of property and equipment

     (1,834,000 )     (903,000 )

Purchase of available-for-sale securities

     (39,056,000 )     (37,170,000 )

Disposition of available-for-sale securities

     72,861,000       25,798,000  

Cash paid for asset acquisitions, net of cash received of $55,000

     (2,904,000 )     —    
    


 


Net cash provided by (used in) investing activities

     29,067,000       (12,275,000 )
    


 


Cash flows from financing activities:

                

Principal payments on notes payable

     —         (144,000 )

Principal payments under capital lease obligations

     (936,000 )     (738,000 )

Net proceeds from the issuance of common shares

     5,250,000       69,433,000  
    


 


Net cash provided by financing activities

     4,314,000       68,551,000  
    


 


Net increase in cash and cash equivalents

     65,994,000       67,657,000  

Effect of foreign exchange rates on cash and cash equivalents

     247,000       (449,000 )

Cash and cash equivalents, beginning of period

     61,581,000       46,674,000  
    


 


Cash and cash equivalents, end of period

   $ 127,822,000     $ 113,882,000  
    


 


Supplemental disclosure of cash flow information:

                

Cash paid for interest

   $ 186,000     $ 201,000  

Cash paid for income taxes

   $ 576,000     $ 159,000  

Supplemental disclosure of non-cash investing and financing activities:

                

Equipment acquired under capital lease arrangements

   $ 1,031,000     $ 749,000  

Issuance of common shares in connection with asset acquisition:

                

Assets acquired

   $ 6,948,000     $ —    

Liabilities assumed

   $ 2,310,000     $ —    

Settlement of obligation between the parties

   $ 204,000     $ —    

Value of common shares issued

   $ 1,530,000     $ —    

Unrealized gain (loss) on available-for-sale securities

   $ (84,000 )   $ 51,000  

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

ALTIRIS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1) Organization and description of business

 

Altiris, Inc. (the “Company”) was incorporated in Utah in August 1998 and reincorporated in Delaware in February 2002. The Company develops and markets Information Technology (“IT”) lifecycle management software products that enable IT professionals to better utilize and manage corporate IT resources. The Company markets its software products directly to end user licensees and indirectly through original equipment manufacturers (“OEM”), distributors and other indirect sales channels.

 

(2) Significant accounting policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) on the same basis as the Company’s audited annual financial statements, and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 are adequate to make the information presented not misleading.

 

The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company as of the balance sheet dates and for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any future interim periods or for the entire calendar year ending December 31, 2004.

 

Principles of consolidation

 

The consolidated financial statements include the financial statements of Altiris, Inc. and its wholly-owned subsidiaries, Altiris Australia Pty Ltd., Altiris Computing Edge, Inc., Wise Solutions, Inc., Altiris GmbH (Germany), Altiris Services GmbH, Altiris Ltd., Altiris S.A.R.L., Altiris B.V., Altiris AB, Altiris GmbH (Switzerland), Altiris Estonia OÜ, Altiris K.K. and Altiris Singapore Pte Ltd. (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

 

Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts receivable and product returns, impairment of long-lived assets, and valuation allowances against deferred income tax assets.

 

Cash equivalents

 

Cash equivalents consist of investments with original maturities of three months or less. Cash equivalents consisted primarily of investments in commercial paper, U.S. government and agency securities, taxable auction rate notes and money market funds and are recorded at cost, which approximates fair value. Cash equivalents were $107.9 million and $42.4 million as of September 30, 2004 and December 31, 2003, respectively.

 

Available-For-Sale Investment Securities

 

Available-for-sale securities consist primarily of securities that either mature within the next 12 months or have other characteristics of short-term investments. These include corporate debt, which have contractual maturities ranging from one to two years.

 

All marketable debt securities classified as available-for-sale are available for working capital purposes, as necessary. Available-for-sale securities are recorded at fair market value. The unrealized gains and losses, net of related tax effect, related to these securities are included as a component of Other Comprehensive Income until realized. Fair market values are based on quoted market prices. A decline in market value that is considered to be other than temporary is charged to earnings resulting in a new cost basis for the security. No securities have been in a continuous unrealized loss position for 12 or more months. When securities are sold, their cost is determined based on the specific identification method. Realized gains of $17,000 and $251,000 for the three months ended September 30, 2004 and 2003 and $7,000 and $251,000 for the nine months ended September 30, 2004 and 2003, respectively, have been recognized as a component of other income (expenses), net.

 

Available-for-sale securities as of September 30, 2004 are summarized as follows:

 

     Cost

  

Gross

Unrealized

Gains


  

Gross

Unrealized

Losses


   

Fair Market

Value


U.S. Government and Agency Securities

   $ 33,048,000    $ 12,000    $ (105,000 )   $ 32,955,000

Corporate debt

     8,677,000      42,000      (21,000 )     8,697,000

Equities

     1,815,000      101,000      —         1,916,000
    

  

  


 

Total available-for-sale securities

   $ 43,540,000    $ 155,000    $ (126,000 )   $ 43,568,000
    

  

  


 

 

6


Table of Contents

ALTIRIS INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Available-for-sale securities as of December 31, 2003 are summarized as follows:

 

     Cost

  

Gross

Unrealized

Gains


  

Gross

Unrealized

Losses


   

Fair Market

Value


U.S. Government and Agency Securities

   $ 68,082,000    $ 73,000    $ (15,000 )   $ 68,140,000

Corporate debt

     8,077,000      52,000      (23,000 )     8,106,000

Equities

     1,180,000      24,000      —         1,204,000
    

  

  


 

Total available-for-sale securities

   $ 77,339,000    $ 149,000    $ (38,000 )   $ 77,450,000
    

  

  


 

 

Revenue recognition

 

The Company applies the provisions of Statement of Position (“SOP”) 97-02, Software Revenue Recognition, as amended by SOP 98-09. SOP 97-02, as amended, generally requires revenue earned on software arrangements involving multiple elements such as software products, annual upgrade protection (“AUP”), technical support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on vendor-specific objective evidence (“VSOE”). If VSOE of all undelivered elements exists but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue.

 

The Company licenses its IT lifecycle management software products primarily under perpetual licenses. The Company recognizes revenue from licensing of software products to an end-user when persuasive evidence of an arrangement exists and the software product has been delivered to the customer, provided there are no uncertainties surrounding product acceptance, fees are fixed or determinable, and collectibility is probable. For licenses where VSOE for AUP and any other undelivered elements exist, license revenue is recognized upon delivery using the residual method. As a result, license revenue is recognized in the period in which persuasive evidence of an arrangement is obtained assuming all other revenue recognition criteria are met. For licensing of the Company’s software to OEMs, revenue is not recognized until the software is sold by the OEM to an end-user customer. For licensing of the Company’s software through other indirect sales channels, revenue is recognized when the software licenses are sold by the reseller, value added reseller or distributor to an end-user. Discounts given to resellers and distributors are classified as a reduction of license revenue. The Company considers all arrangements with payment terms longer than the Company’s normal business practice, which do not extend beyond 12 months, not to be fixed or determinable and revenue is recognized when the fee becomes due. If collectibility is not considered probable for reasons other than extended payment terms, revenue is recognized when the fee is collected. Service arrangements are evaluated to determine whether the services are essential to the functionality of the software. Revenue is recognized using contract accounting for arrangements involving customization or modification of the software or where software services are considered essential to the functionality of the software. Revenue from these software arrangements is recognized using the percentage-of-completion method with progress-to-complete measured using labor cost inputs.

 

The Company derives services revenue primarily from AUP, technical support arrangements, consulting and training. AUP and technical support revenue is recognized using the straight-line method over the period that the AUP or support is provided. The Company uses a mid-month convention when recognizing AUP revenues. Revenue from training arrangements and from consulting services is recognized as the services are performed.

 

The Company generally provides a 30-day return right in connection with its software licenses. The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which has been reflected as a reduction to accounts receivable. Revenue generated from operations for which the Company does not have sufficient historical return experience to estimate returns will not be recognized until the return right lapses.

 

Historically, the Company required a purchase order to demonstrate persuasive evidence of an arrangement. However, the Company has recently encountered customers who do not have a customary business practice of using purchase orders. In these instances, the Company will consider electronic mail to be persuasive evidence of an arrangement. Accordingly, effective April 1, 2004, the Company began considering electronic mail with the same information, qualifications, and appropriate approvals contained in a physical purchase order to be persuasive evidence of an arrangement when it is customary business practice for the customer.

 

Intangible assets

 

Intangible assets represent acquired intellectual property, customer lists, core technology, trademark and trade name, and non-compete agreements. The intangible assets, other than trademark and trade name which have an indefinite useful life, are being amortized using the straight-line method over estimated useful lives of 18 months to 6 years. Amortization of acquired intellectual property is classified as a cost of revenue in the accompanying statements of operations.

 

Impairment of long-lived assets

 

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. As of September 30, 2004, management did not consider any of the Company’s long-lived assets to be impaired.

 

7


Table of Contents

ALTIRIS INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Goodwill

 

Goodwill resulted from the Company’s acquisition of Wise Solutions effective December 1, 2003. The Company applies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which prohibits the amortization of goodwill. Instead, goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate a potential impairment exists. As of September 30, 2004, management did not consider goodwill to be impaired. There can be no assurance that future impairment tests will not result in an impairment charge to earnings.

 

Translation of foreign currencies

 

The Company transacts business in various foreign currencies. In general, the functional currency of a foreign operation is the local country’s currency. Consequently, assets and liabilities of foreign subsidiaries have been translated to U.S. dollars using period-end exchange rates. Income and expense items have been translated at the average rate of exchange prevailing during the period. Any adjustment resulting from translating the financial statements of the foreign subsidiaries is reflected as other comprehensive income (loss), which is a component of stockholders’ equity (deficit). Foreign currency transaction gains or losses are reported in the accompanying consolidated statements of operations in other income (expense), net and amounted to a gain of $40,000 and $407,000 for the three months ended September 30, 2004 and 2003, respectively. Foreign currency transaction gains or losses amounted to a loss of $365,000 for the nine months ended September 30, 2004 and a gain of $437,000 for the nine months ended September 30, 2003.

 

Income taxes

 

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized

 

Stock-based compensation

 

The Company accounts for its stock-based compensation and employee stock purchase rights issued to directors, officers, and employees under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, compensation expense is recognized if an option’s exercise price on the measurement date is below the fair market value of the Company’s common stock. The compensation, if any, is amortized to expense over the vesting period.

 

SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma information regarding net income as if the Company had accounted for its stock options granted under the fair value method prescribed by SFAS No. 123. Under this method, compensation expense is recorded on the date of grant based on the estimated fair value of the option on the grant date. The weighted-average fair value of the options granted under the plans for the three months ended September 30, 2004 and 2003 and for the nine months ended September 30, 2004 and 2003 was $20.70, $20.62, $24.24 and $13.15, respectively. The fair value of the stock options is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for grants during the three months ended September 30, 2004 and 2003 and during the nine months ended September 30, 2004 and 2003: average risk-free interest rates of 3.36, 2.03, 3.09 and 2.67 percent, respectively; weighted average volatility of 139, 164, 139 and 165 percent, respectively; expected dividend yield of 0 percent; and an expected life of six years. The weighted-average fair value of employee stock purchase rights granted under the employee stock purchase plan for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003 was $9.56, $8.17, $9.56 and $8.17, respectively. The fair value for the employee stock purchase rights was estimated using the Black-Scholes model with the following assumptions for the three months ended September 30, 2004 and 2003 and for the nine months ended September 30, 2004 and 2003: risk free interest rates of 1.91, 0.97, 1.91 and 0.97 percent, respectively; weighted average volatility of 139, 164, 139 and 164 percent, respectively; expected dividend yield of 0 percent; and an expected life of six months. For purposes of the pro forma disclosures, the estimated fair value of the stock options is amortized over the vesting periods of the respective stock options, and the estimated fair value of the employee stock purchase rights is amortized over the respective term of the purchase period. The following is the pro forma disclosure and the related impact on net income and net income per common share for the three and nine months ended September 30, 2004 and 2003:

 

     Three Months Ended September 30,

    Nine Months Ended September 30,

 
     2004

    2003

    2004

    2003

 

Net income attributable to common stockholders:

                                

As reported

   $ 3,389,000     $ 3,848,000     $ 10,176,000     $ 9,630,000  

Stock-based employee compensation expense included in reported net income, net of tax

     153,000       321,000       456,000       985,000  

Stock-based employee compensation expense determined under fair-value method for all awards, net of related tax effects

     (4,553,000 )     (2,348,000 )     (11,866,000 )     (6,783,000 )
    


 


 


 


Pro forma net income (loss)

   $ (1,013,000 )   $ 1,821,000     $ (1,234,000 )   $ 3,832,000  
    


 


 


 


Basic net income (loss) per common share:

                                

As reported

   $ 0.13     $ 0.16     $ 0.39     $ 0.44  

Pro forma

   $ (0.04 )   $ 0.08     $ (0.05 )   $ 0.18  

Diluted net income (loss) per common share:

                                

As reported

   $ 0.12     $ 0.15     $ 0.37     $ 0.42  

Pro forma

   $ (0.04 )   $ 0.07     $ (0.05 )   $ 0.17  

 

8


Table of Contents

ALTIRIS INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Reclassifications

 

Certain amounts in prior period financial statements have been reclassified to conform with the current period’s presentation.

 

(3) Net income per common share

 

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (“Diluted EPS”) is computed by dividing net income by the sum of the weighted average number of common shares outstanding and the weighted average dilutive common share equivalents then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.

 

Common share equivalents consist of shares issuable upon the exercise of stock options. During the three and nine months ended September 30, 2004 and 2003, there were 222,000, 0, 222,000, and 0 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS, as their effect would be anti-dilutive.

 

The following table summarizes the Company’s share computations for the three and nine months ended September 30, 2004 and 2003:

 

     Three months ended September 30,

   Nine months ended September 30,

     2004

   2003

   2004

   2003

Basic Weighted Average Shares Outstanding:

   26,695,000    23,556,000    26,385,000    21,788,000

Dilutive Effect of Stock Options

   1,141,000    1,414,000    1,202,000    1,269,000

Dilutive Effect of the Employee Stock Purchase Plan

   4,000    6,000    4,000    6,000
    
  
  
  

Diluted Weighted Average Shares Outstanding:

   27,840,000    24,976,000    27,591,000    23,063,000
    
  
  
  

 

(4) Asset and Business Acquisitions

 

FSLogic

 

On February 26, 2004, the Company acquired FSLogic Inc. (“FSLogic”) by means of a merger of FSLogic with and into FSL L.L.C., a Utah limited liability company and a wholly owned subsidiary of the Company (the “FSLogic Acquisition”). At the effective time of the FSLogic Acquisition, the separate corporate existence of FSLogic ceased, and FSL L.L.C. survived as a wholly owned subsidiary of the Company. The 31,970 shares of the Company’s common stock issued in connection with the FSLogic Acquisition were valued at approximately $0.8 million based upon the closing price on February 25, 2004, the date the Company signed the merger agreement with FSLogic.

 

A total purchase price and allocation among the tangible and identifiable intangible assets acquired and liabilities assumed is summarized as follows:

 

Cash consideration

   $ 875,000

Common stock

     840,000

Acquisition costs

     27,000
    

Total purchase price

   $ 1,742,000
    

 

The financial information presented includes purchase accounting adjustments to the tangible and intangible assets:

 

     Amount

   

Amortization

Period


Tangible assets

   $ 11,000      

Liabilities

     (1,107,000 )    

Intangible assets:

            

Core technology

     2,778,000     18 months

Trademark and patent

     60,000     18 months
    


   

Purchase Price

   $ 1,742,000      
    


   

 

No proforma information is provided for this acquisition as the results are immaterial to the results of the Company as a whole.

 

9


Table of Contents

ALTIRIS INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

BridgeWater Technologies

 

On August 31, 2004, the Company purchased certain assets and assumed certain liabilities from BridgeWater Technologies, Inc. (“BridgeWater”), (the “BridgeWater acquisition”). The 29,082 shares of the Company’s common stock issued in connection with the Acquisition were valued at approximately $0.7 million based upon the closing price on August 31, 2004, the date the Company signed the asset purchase agreement with BridgeWater.

 

A total purchase price and allocation among the tangible and identifiable intangible assets acquired and liabilities assumed is summarized as follows:

 

Cash consideration and forgiveness of a liability due to the Company

   $ 2,204,000

Common stock

     690,000

Acquisition costs

     21,000
    

Total purchase price

   $ 2,915,000
    

 

The financial information presented includes the tangible and intangible assets:

 

     Amount

   

Amortization

Period


Tangible assets

   $ 65,000      

Liabilities

     (50,000 )    

Intangible assets:

            

Core technology

     2,825,000     18 months

Non-compete agreement

     50,000     18 months

Customer Lists

     25,000     18 months
    


   

Purchase Price

   $ 2,915,000      
    


   

 

Wise Solutions

 

In December 2003, the Company acquired Wise Solutions, Inc. (“Wise Solutions”), as previously disclosed.

 

During the first quarter of 2004, the Company paid additional legal fees directly associated with the acquisition of $84,000.

 

During the second quarter of 2004, the Company booked additional goodwill related to the acquisition of Wise Solutions of $1.1 million. This increase was related to the termination of employees of Wise Solutions, which was accounted for in accordance with EITF 95-3: Recognition of Liabilities in Connection with a Purchase Business Combination, and a resolution of a pre-acquisition contingency related to InstallShield’s suit against Wise Solutions. The Company had been waiting for the additional information since the date of acquisition.

 

The transaction was accounted for as a purchase and, accordingly, the operating results of Wise Solutions have been included in the Company’s accompanying condensed consolidated statements of operations from the date of acquisition. The following unaudited pro forma information presents the combined results of the Company and Wise Solutions as if the acquisition had occurred as of the beginning of 2003, after applying certain adjustments, including amortization of intangible assets and interest income, net of related tax effects. In-process research and development of $0.9 million has been excluded from the following presentation:

 

    

For the three

months ended


  

For the nine

months ended


    

September 30,

2003


  

September 30,

2003


Net revenues

   $ 30,087,000    $ 83,657,000

Net income

   $ 2,166,000    $ 5,880,000

Basic net income per share

   $ 0.09    $ 0.27

Diluted net income per share

   $ 0.09    $ 0.25

 

(5) Commitments and contingencies

 

Indemnifications

 

Certain of the Company’s negotiated license agreements include a limited indemnification provision for claims by third parties relating to the Company’s rights to use and distribute its products. Such indemnification provisions are accounted for in accordance with SFAS No. 5, Accounting for Contingencies. At September 30, 2004, the Company is not aware of any material liabilities arising from these indemnifications.

 

Legal matters

 

On December 23, 1999, the Company commenced a patent infringement suit against Symantec Corporation, or Symantec, in the United States District Court for the District of Utah, or District Court, requesting compensatory damages and injunctive relief. In its response to the Company’s complaint, Symantec denied the Company’s claim of infringement and brought a counterclaim against the Company asserting that the Company’s patent is invalid and that the Company is infringing and diluting Symantec’s trademarks.

 

10


Table of Contents

In July 2001, the District Court conducted a hearing for the purpose of construing or interpreting the claims comprising the Company’s patent, and in August 2001, the District Court issued an order that narrowly construed these claims. In an effort to facilitate the Company’s appeal from the order, the Company entered into a stipulation with Symantec that, based on the order, Symantec’s products do not infringe the Company’s patent. The stipulation also provided that Symantec’s counterclaims of trademark infringement and dilution would be dismissed and the remainder of the lawsuit would be stayed. Symantec’s only remaining counterclaim requests a judgment that the Company’s patent is invalid.

 

In November 2001, the District Court entered a final judgment based on the Company’s stipulation, ruling that Symantec did not infringe the Company’s patent and dismissing Symantec’s counterclaims for trademark infringement and dilution. The Company and Symantec each appealed the District Court’s ruling to the United States Court of Appeals for the Federal Circuit, or Court of Appeals, and on February 12, 2003, the Court of Appeals ruled that the District Court erred in its construction of the claims comprising the Company’s patent and instructed the District Court to reconsider the question of infringement by Symantec based upon the Court of Appeal’s interpretation of the patent. Although management believes that this patent is an important intellectual property asset, management does not believe that it is material to the Company’s business as a whole. Accordingly, management does not believe that an adverse ruling would have a material adverse effect on the Company’s results of operations or financial position.

 

In April 2004, Symantec and its wholly owned subsidiary, PowerQuest Corporation, or PowerQuest, jointly commenced a patent infringement suit against the Company in the United States District Court for the Eastern District of Texas, requesting compensatory damages and injunctive relief. Symantec and PowerQuest initially claimed that the Company is infringing one of Symantec’s patents and two of PowerQuest’s patents. In August 2004, Symantec and PowerQuest amended its complaint and dismissed one of the infringement claims without prejudice. In its answers to the original complaint and amended complaint, the Company has denied the claims of infringement and brought a counterclaim asserting that the patents in question are invalid and that Symantec is infringing two of the Company’s patents. The Company intends to vigorously defend against the claims made by Symantec and PowerQuest and prosecute its counterclaims against Symantec.

 

In June 2003, InstallShield Software Technologies, Inc., or InstallShield, filed suit against Wise Solutions, Inc., or Wise Solutions, in the United States District Court for the Northern District of Illinois Eastern Division. In December 2003, the Company acquired Wise Solutions by means of a merger transaction, with Wise Solutions surviving as the Company’s wholly owned subsidiary. InstallShield claimed that its suit arose out of a criminal investigation of Wise Solutions conducted by the U.S. Attorney’s office in Chicago, Illinois and the FBI. Management believes the government investigation concerns the same facts and circumstances upon which the civil suit was based. In July 2004, the parties entered into a settlement agreement that resolved all claims made by the parties in the civil litigation, and the Court has dismissed the case with prejudice. The Company accrued for this settlement as of June 30, 2004. In September 2004, the Company received written notice from the U.S. Attorney’s office in Chicago, Illinois, informing the Company that the Chicago office had closed its investigation of Wise Solutions and that it had not filed nor sought to file criminal charges against Wise Solutions.

 

The Company is involved in claims, including those identified above, which arise in the ordinary course of business. In accordance with the Statement of Financial Accounting Standards No. 5, “Accounting Contingencies,” the Company makes a provision for a liability when it is both probable that the liability has been incurred

 

11


Table of Contents

ALTIRIS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

and the amount of the loss can be reasonably estimated. Management believes that they have adequate provisions for any such matters. Management reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations or financial position.

 

Concentration of credit risk and significant customers

 

The Company offers credit terms on the sale of its software products to certain customers. The Company periodically performs ongoing credit evaluations of its customers’ financial condition and requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. For the three and nine months ended September 30, 2004 and 2003 and as of September 30, 2004 and December 31, 2003, customers that accounted for more than 10% of total revenue and/or accounts receivable balances are as follows:

 

    

Three months ended

September 30,


   

Nine months ended

September 30,


 
     2004

    2003

    2004

    2003

 

Revenue:

                        

Hewlett Packard

   28 %   21 %   32 %   25 %

Dell

   23 %   20 %   24 %   13 %

 

     September 30,
2004


    December 31,
2003


 

Accounts receivable:

            

Hewlett Packard

   18 %   24 %

Dell

   22 %   16 %

 

(6) Segment, geographic and customer information

 

The Company operates as one segment, the development and marketing of IT lifecycle management software products and services.

 

Revenue from customers located outside the United States accounted for 34% and 30% of total revenue for the three months ended September 30, 2004 and 2003, respectively, and 33% and 32% for the nine months ended September 30, 2004 and 2003, respectively. The majority of international sales have been made in Europe. There were no significant long-lived assets held outside the United States as of September 30, 2004.

 

The following table presents revenue by geographic areas:

 

    

Three months ended

September 30,


  

Nine months ended

September 30,


     2004

   2003

   2004

   2003

Domestic operations:

                           

Domestic customers

   $ 27,020,000    $ 17,671,000    $ 78,918,000    $ 47,103,000

International customers

     1,907,000      649,000      5,880,000      2,568,000
    

  

  

  

Total

     28,927,000      18,320,000      84,798,000      49,671,000
    

  

  

  

International operations:

                           

Europe customers

     9,974,000      6,205,000      27,858,000      17,043,000

Other customers

     1,795,000      829,000      5,475,000      2,299,000
    

  

  

  

Total

     11,769,000      7,034,000      33,333,000      19,342,000
    

  

  

  

Consolidated revenue

   $ 40,696,000    $ 25,354,000    $ 118,131,000    $ 69,013,000
    

  

  

  

 

12


Table of Contents

    ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included elsewhere in this report. In addition to historical information, this Quarterly Report on Form 10-Q 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 statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding the following:

 

  operating expenses;

 

  the impact of quarterly fluctuations of revenue and operating results;

 

  the dependence of our products on the Microsoft Windows market;

 

  our expectations concerning our relationships with Hewlett-Packard Company, or HP, and Dell, Inc., or Dell;

 

  levels of software license revenue;

 

  future acquisitions of or investments in complementary companies, products or technologies;

 

  our expectations concerning relationships with resellers and systems integrators;

 

  levels of capital expenditures;

 

  fluctuations in interest rates;

 

  legal proceedings;

 

  changes in accounting standards;

 

  the trend of our costs and expenses;

 

  staffing and expense levels;

 

  international operations;

 

  adequacy of our capital resources to fund operations and growth; and

 

  improvement or remediation of deficiencies in our internal controls over financial reporting.

 

These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those set forth in the following discussion and under the caption “Factors That May Affect Future Results” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q.

 

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should carefully review the risk factors described in other documents that we file from time to time with the Securities and Exchange Commission.

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to all such reports are available, free of charge, on our Internet website under “Company—Investor Relations—SEC Filings,” as soon as reasonably practicable after we file electronically such material with, or furnish it to, the United States Securities and Exchange Commission, or SEC. Our Internet website address is http://www.altiris.com. Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.

 

Overview

 

Altiris is a leading provider of software products and services that enable organizations to manage IT assets throughout their lifecycles. Our IT lifecycle management solutions address the challenges of IT deployment and migration, software delivery and operations management, inventory tracking and asset management, and server provisioning and management through scalable and integrated software products.

 

13


Table of Contents

History and background

 

We began operations in 1996 as the software division of KeyLabs, a privately held independent software quality and e-commerce testing company. In August 1998, Altiris, Inc. was formed as a separate corporation.

 

Our initial product development was focused on deployment and imaging. In 1999, we released our first migration product. In September 2000, we acquired substantially all of the assets of Computing Edge, which added key components to our software and operations management, and inventory and asset management products. In February 2001, we acquired substantially all of the assets of Tekworks, which included key components of our helpdesk and problem resolution products that we had previously licensed from Tekworks. In March 2001, we acquired Compaq’s Carbon Copy technology, which added remote control capability to our products. In September 2002, we acquired substantially all of the technology assets of Previo, which added system back-up and recovery technology to our product offerings. In December 2003, we acquired Wise Solutions, which added enterprise application packaging to our product offerings. In February 2004, we acquired FSLogic Inc., which added file system layering technology that enhances our application management capabilities. In August 2004, we acquired certain assets of BridgeWater, which adds network device management as well as quarantine capabilities to our suites of products.

 

Sources of revenue

 

We derive the large majority of our revenue from sales of software licenses. We sell our products through online sales and our direct sales force, as well as through indirect channels, such as distributors, value added resellers, or VARs, original equipment manufactures, or OEMs, and systems integrators. We also derive revenue from sales of annual upgrade protection, or AUP, technical support arrangements, consulting and training services. Generally, we include the first year of AUP with the initial license of our products. After the initial AUP term, the customer can renew AUP on an annual basis.

 

The majority of our revenue has been generated in the United States. Revenue from customers outside of the United States accounted for 33% of our total revenue in the nine months ended September 30, 2004, 33% of our total revenue in the year ended 2003, and 20% of our total revenue in the year ended 2002. As of September 30, 2004, we had sales people located internationally in Australia, Belgium, Denmark, France, Germany, Japan, the Netherlands, Singapore, Sweden, Switzerland and the United Kingdom.

 

Revenue recognition

 

We recognize revenue in accordance with Statement of Position 97-2, or SOP 97-2, as modified by SOP 98-9. SOP 97-2, as modified, generally requires revenue earned on software arrangements involving multiple elements such as software products, AUP, technical support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on vendor-specific objective evidence, or VSOE. We establish VSOE based on the price charged when the same element is sold separately. If VSOE of all undelivered elements exists but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue.

 

Historically, we required a purchase order to demonstrate persuasive evidence of an arrangement. However, we have recently encountered customers who do not have a customary business practice of using purchase orders. In these instances, we will consider electronic mail to be persuasive evidence of an arrangement. Accordingly, on April 1, 2004, we began considering electronic mail with the same information, qualifications, and appropriate approvals contained in a physical purchase order to be persuasive evidence of an arrangement when it is customary business practice for the customer.

 

License revenue

 

We license our IT lifecycle management products primarily under perpetual licenses. We recognize revenue from licensing of software products to an end user when persuasive evidence of an arrangement exists and the software product has been delivered to the customer, provided there are no uncertainties surrounding product acceptance, fees are fixed or determinable, and collectibility is probable. For licenses where VSOE for AUP and any other undelivered elements exists, license revenue is recognized upon delivery using the residual method. For licensing of our software to OEMs, revenue is not recognized until the software is sold by the OEM to an end user customer. For licensing of our software through other indirect sales channels, revenue is recognized when the software is sold by the reseller, VAR or distributor to an end user customer. We consider all arrangements with payment terms longer than our normal business practice, which do not extend beyond 12 months, not to be fixed or determinable and revenue is recognized when the fee becomes due. If collectibility is not considered probable for reasons other than extended payment terms, revenue is recognized when the fee is collected. Service arrangements are evaluated to determine whether the services are essential to the functionality of the software. Revenue is recognized using contract accounting for arrangements involving customization or modification of the software or where software services are considered essential to the functionality of the software. Revenue from these software arrangements is recognized using the percentage-of-completion method with progress-to-complete measured using labor cost inputs. As of September 30, 2004, we had $38.8 million of deferred revenue.

 

Services revenue

 

We derive services revenue primarily from AUP, technical support arrangements, consulting, and training. AUP and technical support revenue is recognized using the straight-line method over the period that the AUP or support is provided. Revenue from AUP is recognized using the mid-month convention. Revenue from training arrangements and from consulting services is recognized as the services are performed.

 

Critical accounting policies

 

The policies discussed below are considered by us to be critical to an understanding of our financial statements. The application of these policies places significant demands on the judgment of our management and when reporting financial results, cause us to rely on estimates about the effects of matters that are inherently uncertain. We describe specific risks related to these critical accounting policies below. A summary of significant accounting policies can be found in Note 2 of the Notes to Consolidated Financial Statements. Regarding all of these policies, we caution that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment. Our critical accounting policies include the following:

 

  revenue recognition;

 

  allowances for doubtful accounts receivable and product returns;

 

  impairment of long-lived assets; and

 

  valuation allowances against deferred income tax assets.

 

As described above, we recognize revenue in accordance with SOP 97-2, as amended. Revenue recognition in accordance with SOP 97-2 can be complex due to the nature and variability of our sales transactions. To continue recognizing software license revenue in the period in which we obtain persuasive evidence of an

 

14


Table of Contents

arrangement and deliver the software, we must have VSOE for each undelivered element. If we do not continue to maintain VSOE for undelivered elements, we would be required to defer recognizing the software license revenue until the other elements are delivered, which could have a significant negative impact on our revenue. Additionally, the assessment that services are not essential to the functionality of the software may change depending on our mix (between services and software products) of future arrangements. Further implementation guidelines relating to SOP 97-2 and related modifications as well as new pronouncements may result in unanticipated changes in our revenue recognition practices and such changes could significantly affect our future revenues and results of operations.

 

We offer credit terms on the sale of our products to a significant majority of our customers and require no collateral from these customers. We generally also provide a 30-day return right. We periodically perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected collectibility of all accounts receivable. We also maintain an allowance for estimated returns based on our historical experience. Revenue generated from operations in geographical locations where we do not yet have sufficient historical return experience is not recognized until the return right lapses. Our actual bad debts and returns may differ from our estimates and the difference could be significant.

 

In connection with various acquisitions, we recorded $51.9 million of intangible assets consisting of intellectual property, customer lists, core technology, trademark and trade name, non-compete agreements, and goodwill. Trademark and trade name and goodwill have indefinite lives. We evaluate goodwill for impairment, using a fair value based analysis, at least annually. We evaluate trademark and trade name annually to determine the appropriateness of an indefinite life. If we were to consider trademark and trade name not to be indefinite, we would begin amortizing this intangible asset over the estimated useful life. The identifiable intangible assets are generally amortized over the estimated useful lives ranging from 18 months to 6 years. We evaluate our identifiable intangible assets, property and equipment and other long-lived assets for impairment and assess their recoverability when changes in circumstances lead us to believe that any of our long-lived assets may be impaired. We assess recoverability by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount. If an impairment is indicated, the write-down is measured as the difference between the carrying amount and the estimated fair value.

 

We provided a valuation allowance of $4.8 million and $5.9 million against our entire net deferred tax assets as of September 30, 2004 and December 31, 2003, respectively. The valuation allowance was recorded given the losses we have incurred through September 30, 2004 and the uncertainties regarding our future operating profitability and taxable income. Had we assumed the net deferred tax asset was fully realizable, and released the valuation allowance, a deferred tax provision benefit of $650,000 would have been recorded in the nine months ended September 30, 2004 and 2003. The remaining benefit associated with a release of valuation allowance would be attributable to stock option tax deductions and recorded as an increase to additional paid-in-capital. We will continue to evaluate the evaluation allowance and, in 2004, we may eliminate some or all of the valuation allowance if and as we continue to operate at a profit.

 

Limited operating history

 

Our limited operating history makes the prediction of future operating results difficult. We believe that period-to-period comparisons of operating results should not be relied upon to predict future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in rapidly evolving markets. We are subject to the risks of uncertainty of market acceptance and demand for our products and services, competition from larger, more established companies, short product life cycles, our ability to develop and bring to market new products on a timely basis, dependence on key employees, the ability to attract and retain additional qualified personnel and the ability to obtain adequate financing to support growth and such other risks described under the caption “Factors That May Affect Future Results” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q. In addition, we have been dependent on a limited number of customers for a significant portion of our revenue. We may not be successful in addressing these risks and difficulties.

 

Results of Operations

 

The following table sets forth our historical results of operations expressed as a percentage of total revenue for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003:

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2004

    2003

    2004

    2003

 

Revenues:

                        

Software

   61 %   65 %   64 %   64 %

Services

   39     35     36     36  
    

 

 

 

Total revenue

   100     100     100     100  
    

 

 

 

Cost of Revenue:

                        

Software

   1     2     1     1  

Amortization of acquired intellectual property

   3     1     3     1  

Services

   14     10     13     11  
    

 

 

 

Total cost of revenue

   18     13     16     13  
    

 

 

 

Gross Profit

   82     87     84     87  
    

 

 

 

Operating Expenses:

                        

Sales and marketing

   39     38     39     40  

Research and development

   19     24     20     25  

General and administrative

   9     7     9     8  

Stock-based compensation

   —       1     —       1  

Amortization of intangibles

   2     —       2     —    
    

 

 

 

Total operating expenses

   69     70     70     74  
    

 

 

 

Income (loss) from operations

   13     17     14     13  

Other income (expense), net

   1     3     1     3  

Provision for income taxes

   (6 )   (5 )   (6 )   (2 )
    

 

 

 

Net income (loss)

   8 %   15 %   9 %   14 %
    

 

 

 

 

15


Table of Contents

Revenue

 

Our total revenue increased from $25.4 million for the three months ended September 30, 2003 to $40.7 million for the three months ended September 30, 2004, representing growth of 61% and from $69.0 million for the nine months ended September 30, 2003 to $118.1 million for the nine months ended September 30, 2004, representing growth of 71%. Revenue from customers outside of the United States increased from $7.7 million for the three months ended September 30, 2003 to $13.7 million for the three months ended September 30, 2004, representing growth of 78%, and from $21.9 million for the nine months ended September 30, 2003 to $39.2 million for the nine months ended September 30, 2004, representing growth of 79%. Sales to HP and Dell accounted for 21% and 20% of our total revenue for the three months ended September 30, 2003, respectively, and 28% and 23% of our total revenue for the three months ended September 30, 2004, respectively, and 25% and 13% of our total revenue for the nine months ended September 30, 2003, respectively and 32% and 24% of our total revenue for the nine months ended September 30, 2004, respectively. We expect sales to HP and Dell will likely continue to represent a significant portion of our total revenue in the future.

 

Software. Our software revenue increased from $16.6 million for the three months ended September 30, 2003 to $24.8 million for the three months ended September 30, 2004, representing growth of 49%. The increase in the three months ended September 30, 2004 as compared to the comparable fiscal 2003 period was primarily due to the expansion of our product offerings and an increase in purchases of integrated suites of products as compared to lower priced purchases of individual product modules and, to a lesser extent, expansion of our relationships and indirect sales channel and expansion of our direct sales forces.

 

Our software revenue increased from $44.5 million for the nine months ended September 30, 2003 to $75.0 million for the nine months ended September 30, 2004, representing growth of 69%. The increase during the nine months ended September 30, 2004 as compared to the comparable fiscal 2003 period was primarily due to the expansion of our product offerings and an increase in purchases of integrated suites of products as compared to lower priced purchases of individual product modules and, to a lesser extent, expansion of our relationships and indirect sales channel and expansion of our direct sales forces.

 

Services. Services revenue increased from $8.8 million for the three months ended September 30, 2003 to $15.9 million for the three months ended September 30, 2004, representing an increase of 82%. The $7.2 million increase in services revenue in the three months ended September 30, 2004 as compared to the comparable period of 2003 was mainly due to an increase of $3.6 million of new and renewed AUP associated with the increase in software license revenue and an increase of $3.6 million in consulting and training revenue due to more service engagements purchased.

 

Services revenue increased from $24.6 million for the nine months ended September 30, 2003 to $43.1 million for the nine months ended September 30, 2004, representing an increase of 75%. The $18.5 million increase was primarily due to $9.3 million of new and renewed AUP associated with the increase in software license revenue and to an increase of $10.2 in consulting and training revenue, offset by a $1.0 million decrease in conference revenue from the Microsoft Management Summit (MMS) user conference. We did not participate as a co-sponsor in the 2004 MMS user conference as we had done in previous years.

 

Cost of revenue

 

Software. Cost of software license revenue consists primarily of our amortization of acquired intellectual property, licensing and order fulfillment personnel, royalties, duplication charges and packaging supplies. Our cost of software license revenue increased from $0.6 million for the three months ended September 30, 2003 to $1.6 million for the three months ended September 30, 2004, representing an increase of 166%. The increase was due to a $1.2 million increase in amortization of acquired intellectual property, offset by a $0.2 million decrease in software license costs.

 

Our cost of software license revenue increased from $1.3 million for the nine months ended September 30, 2004 to $4.2 million for the nine months ended September 30, 2004, representing an increase of 237%. The increase in amortization of acquired intellectual property is due to the acquired intellectual property from the acquisitions of Wise, FSLogic, and BridgeWater.

 

Services. Cost of services revenue consists primarily of salaries and related costs for technical support personnel, engineers associated with consulting services, training personnel, and the cost of the MMS user conference. Our cost of services revenue increased from $2.6 million for the three months ended September 30, 2003 to $5.6 million for the three months ended September 30, 2004. The increase in our cost of services revenue was due to an increase of $3.0 million in professional service costs associated with the increase in related consulting and training revenue from an increase in service engagements. Cost of services revenue represented 30% of services revenue for the three months ended September 30, 2003 and 35% for the three months ended September 30, 2004.

 

Our cost of services revenue increased from $7.4 million for the nine months ended September 30, 2004 to $14.8 million for the nine months ended September 30, 2004. The increase in our cost of services revenue was primarily due to an increase of $8.4 million in professional service costs associated with the increase in related consulting and training revenue, offset by a decrease of $1.0 million in conference costs from not participating as a co-sponsor in the 2004 MMS user conference. Cost of services revenue represented 30% of services revenue for the nine months ended September 30, 2003 and 34% of services revenue for the nine months ended September 30, 2004. Cost of services revenue as a percentage of services revenue is expected to remain relatively consistent.

 

Operating expenses

 

Sales and marketing. Sales and marketing expense consists primarily of salaries, sales commissions, bonuses, benefits and related costs of sales and marketing personnel, tradeshow and other marketing activities. Sales and marketing expense increased from $9.7 million for the three months ended September 30, 2003 to $15.9 million for the three months ended September 30, 2004, an increase of 65%, and from $27 million for the nine months ended September 30, 2003 to $46.4 million for the nine months ended September 30, 2004, an increase of 72%. The increases in both fiscal 2004 periods as compared to the comparable 2003 fiscal periods were primarily due to an increase in salaries and benefits, including commissions, from an increase in our worldwide sales and marketing personnel, including customer services and support, which increased from 232 employees at September 30, 2003 to 338 employees at September 30, 2004. In addition, we had increased expenses related to travel and advertising and expansion of our sales infrastructure and the establishment of additional third-party channel partners. Sales and marketing expense represented 38% of total revenue for the three months ended September 30, 2003 and 39% of total revenue for the three months ended September 30, 2004 and represented 40% of total revenue for the nine months ended September 30, 2003 and 39% of total revenue for the nine months ended September 30, 2004. The increase primarily was due to the increase in the sales force from the acquisition of Wise Solutions, offset by economies of scale resulting from increases in the number and size of sales transactions as well as the allocation of marketing expenses over a substantially larger revenue base. We plan to continue expanding our sales, marketing, and support functions and increasing our relationships with key customers. We expect sales and marketing expenses to continue to increase in absolute dollars during 2004 as we expand our sales and marketing efforts.

 

Research and development. Research and development expense consists primarily of salaries, bonuses, benefits and related costs of engineering, product strategy and quality assurance personnel. Research and development expense increased from $6.2 million for the three months ended September 30, 2003 to $7.9 million for the three months ended September 30, 2004, an increase of 28% and from $17.4 million for the nine months ended September 30, 2003 to $23.6 million for the nine months ended September 30, 2004, an increase of 35%. The increases in both fiscal 2004 periods as compared to the comparable fiscal 2003 periods were primarily due to an increase in expenses associated with the hiring of additional engineering, testing and technical documentation personnel, which resulted in an increase from 202 employees at September 30, 2003 to 259 employees at September 30, 2004. Research and development expense represented 24% of total revenue for the three months ended September 30, 2003 and 19% of total revenue for the three months ended September 30, 2004. Research and development expense represented 25% of total revenue for the nine months ended September 30, 2003 and 20% of total revenue for the nine months ended September 30, 2004. We expect that research and development expense will continue to increase in absolute dollars as we invest in additional software products in 2004.

 

General and administrative. General and administrative expense consists of salaries, bonuses, benefits and related costs of executive, finance, and administrative personnel and outside service expense, including legal and accounting expenses. General and administrative expense increased from $1.8 million for the three months ended September 30, 2003 to $3.6 million for the three months ended September 30, 2004, an increase of 105% and from $5.6 million for the nine months ended September 30, 2003 to $10.2 million for the nine months ended September 30, 2004, an increase of 82%. The increases in both fiscal 2004 periods as compared to the

 

16


Table of Contents

comparable fiscal 2003 periods were primarily due to additional expenses related to increased staffing necessary to manage and support our growth. General and administrative personnel increased from 51 employees at September 30, 2003 to 76 employees at September 30, 2004. General and administrative expense represented 7% of total revenue for the three months ended September 30, 2003 and 9% for the three months ended September 30, 2004. General and administrative expense represented 8% of total revenue for the nine months ended September 30, 2003 and 9% for the nine months ended September 30, 2004. We expect that general and administrative expense will continue to increase through the remainder of 2004 to support our growth and due to costs associated with being a public company and compliance with new regulatory requirements.

 

Stock-based compensation. We recorded deferred stock-based compensation relating to stock option grants to employees of $3.9 million in 2000, $1.0 million in 2001 and $2.7 million in 2002. We recognized stock-based compensation expense of $0.3 million for the three months ended September 30, 2003 and $0.2 million for the three months ended September 30, 2004. We recognized stock-based compensation expense of $1.0 million for the nine months ended September 30, 2003 and $0.5 million for the nine months ended September 30, 2004. Of the remaining balance of $0.4 million of deferred compensation, we expect to expense $0.2 million for the remainder of 2004.

 

Amortization of intangible assets. Amortization of intangible assets relates to the intangible assets acquired in various acquisitions, excluding intellectual property. Amortization of intangible assets increased from $0 for the three months ended September 30, 2003 to $687,000 for the three months ended September 30, 2004. The increase is due to the $687,000 amortization related to the Wise Solutions, FSLogic, and BridgeWater acquisitions. Amortization of intangible assets increased from $41,000 for the nine months ended September 30, 2003 to $2.0 million for the nine months ended September 30, 2004. The increase is due to the $2.0 million amortization related to the Wise Solutions, FSLogic, and BridgeWater acquisitions.

 

Other income (expense), net. Other income (expense), net consists primarily of interest income, interest expense and foreign currency transaction gains and losses. We had other income of $1.0 million for the three months ended September 30, 2003, which consists primarily of interest income, foreign currency transaction gains, and a gain from the termination of the Vision license agreement with MasterSolution, Inc., offset by interest expense. We had other income of $0.6 million for the three months ended September 30, 2004, which consists primarily of interest income and foreign currency transaction gains, offset by interest expense. We had other income of $2.2 million for the nine months ended September 30, 2003, which consists primarily of interest income, foreign currency transaction gains, and a gain from the termination of the Vision license agreement, offset by interest expense. We had other income of $1.0 million for the nine months ended September 30, 2004, which consisted primarily of interest income, offset by foreign currency transaction losses and interest expense.

 

Provision for income taxes. The provision for income taxes consists of federal and state income taxes attributable to current year operations and for foreign jurisdictions in which we generated taxable income. The federal and state provision results from current year taxable earnings before stock option deductions. The resulting benefit from the utilization of stock option deductions is recorded in additional paid-in capital. The provision for income taxes was $1.3 million in the three months ended September 30, 2003 and $2.4 million in the three months ended September 30, 2004. The provision for income taxes was $1.8 million in the nine months ended September 30, 2003 and $7.4 million in the nine months ended September 30, 2004. The increase in the provision for income taxes in both periods is due to increased profitability both domestically and internationally.

 

Liquidity and Capital Resources

 

Since inception, we have funded our operations primarily through borrowings and equity investments. Prior to becoming a public company, we issued shares of our preferred stock which subsequently converted into common shares upon completion of our initial public offering in May 2002, except for shares of our Series C non-voting preferred stock, which converted into Class B non-voting common stock, then later automatically converted into voting common stock in May 2003. In August 2003, we completed a follow-on public offering of 3,750,000 shares of our common stock and realized net proceeds from the offering of $66.0 million.

 

Our operating activities provided $32.6 million of cash during the nine months ended September 30, 2004 and $11.4 million during the nine months ended September 30, 2003. Cash provided by operating activities in the first nine months of 2004 consisted primarily of net income of $10.2 million, adjusted for $7.6 million of depreciation and amortization, $0.5 million of stock-based compensation, a $2.5 million provision for doubtful accounts and other allowances, and $7.3 million for a reduction of income taxes payable as a result of stock option exercises, offset by a $1.3 million increase in deferred income taxes mainly due to the acquisition of FSLogic. Changes in operating assets and liabilities provided $5.8 million of cash during the first nine months of 2004 consisting primarily of a $12.7 million increase in deferred revenue, a $2.1 million increase in accrued salaries and benefits, and a $2.4 million increase in other accrued expenses, offset by a $11.0 million increase in accounts receivable and a $0.2 million increase in prepaid expenses and other current assets. Net cash used by operating activities in 2003 consisted primarily of the net income of $9.6 million, adjusted for $2.0 million of depreciation and amortization, $1.0 million of stock-based compensation and a $1.2 million provision for doubtful accounts and other allowances. Changes in operating assets and liabilities used $2.4 million of cash during the nine months ended September 30, 2003.

 

Accounts receivable, net increased from $23.5 million as of December 31, 2003 to $31.8 million as of September 30, 2004. Accounts receivable increased as of September 30, 2004 primarily due to sales during the last month of the period with payment not then due. Deferred revenue increased from $26.0 million as of December 31, 2003 to $38.8 million as of September 30, 2004.

 

Investing activities provided $29.1 million of cash during the nine months ended September 30, 2004 and $12.3 of cash during the nine months ended September 30, 2003. Cash provided by investing activities during the nine months ended September 30, 2004 consisted of $72.9 million in dispositions of available-for-sale securities, offset by $39.1 million in purchases of available-for-sale securities, $1.8 million for purchases of property and equipment, and $2.9 million for acquisitions. Cash provided in investing activities during the nine months ended September 30, 2003 primarily consisted of $25.8 million in dispositions of available-for-sale securities, offset by $37.2 million in purchases of available-for-sale securities and $0.9 million for purchases of property and equipment.

 

Financing activities provided $4.3 million of cash during the nine months ended September 30, 2004 and $68.6 million of cash during the nine months ended September 30, 2003. During the nine months ended September 30, 2004, we received $5.2 million of cash from the exercise of stock options, offset by $0.9 million of payments on capital lease obligations. The cash provided by financing activities during the nine months ended September 30, 2003 consisted primarily of $69.4 million of cash from the issuance of common stock, net of issuance costs, offset by $0.9 million of payments on notes payable and capital lease obligations.

 

As of September 30, 2004, we had stockholders’ equity of $192.0 million and working capital of $154.6 million. Included in working capital is deferred revenue of $33.5 million, which will not require dollar for dollar of cash to settle but will be recognized as revenue in the future. We believe that our current working capital, together with cash anticipated to be provided by operations, will be sufficient to satisfy our anticipated cash requirements and capital expenditures for the foreseeable future.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations as of September 30, 2004 (in thousands):

 

     Payments Due by Period

     Total

  

Less than

1 Year


  

1-3

Years


  

After

3 Years


Contractual Obligations:

                           

Capital leases

   $ 1,923    $ 1,009    $ 914    $ —  

Operating leases

     7,166      2,730      4,391      45
    

  

  

  

Total contractual obligations

   $ 9,089    $ 3,739    $ 5,305    $ 45
    

  

  

  

 

17


Table of Contents

As of September 30, 2004, we did not have any other commercial commitments, such as letters of credit, guarantees or repurchase obligations.

 

Recently Issued Accounting Pronouncements

 

The Emerging Issues Task Force has issued EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The issue is to determine the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of FASB Statement 115, Accounting for Certain Investments in Debt and Equity Securities, and equity securities that are not subject to the scope of Statement 115 and not accounted for under the equity method of accounting. The impairment methodology for various types of investments accounted for in accordance with the provisions of APB Opinion 18, The Equity Method of Accounting for Investments in Common Stock, and FASB Statement 115 is predicated on the notion of other than temporary that is ambiguous and has led to inconsistent application. The Task Force reached a consensus that the application guidance in EITF 03-1 should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance of this Issue should be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Emerging Issues Task Force has also proposed two staff positions supplementing EITF 03-1. EITF 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” provides guidance on the meaning of the phrase other-than temporary impairment and its application to several types of investments, including debt securities classified as held-to-maturity and available-for-sale under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. EITF 03-1-b, Effective Date of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” would provide implementation guidance with respect to debt securities that are impaired solely because of interest rate and/or sector spread increases and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The adoption of this interpretation, as well as the proposed supplemental interpretations, is not expected to have a material effect on our business, results of operations, financial position, or liquidity.

 

Factors That May Affect Future Results

 

Set forth below and elsewhere in this Quarterly Report on Form 10-Q, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

Our quarterly operating results are difficult to predict, and if we do not meet quarterly financial expectations of securities analysts or investors, our stock price would likely decline.

 

Our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. It is possible that our operating results in some quarters will be below market expectations. If this happens, the market price of our common stock would likely decline. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful, and you should not rely on them as an indication of our future performance. Fluctuations in our future quarterly operating results may be caused by many factors, including:

 

  changes in demand for our products;

 

  the size, timing and contractual terms of orders for our products;

 

  any downturn in our customers’ and potential customers’ businesses, the domestic economy or international economies where our customers and potential customers do business;

 

  the timing of product releases or upgrades by us or by our competitors;

 

  any significant change in the competitive dynamics of our markets, including strategic alliances and consolidation among our competitors or our strategic partners;

 

  changes in the mix of revenue attributable to higher-margin software products as opposed to substantially lower-margin services;

 

  changes in customers’ or partners’ businesses resulting from disruptions in the geopolitical environment including military conflict or acts of terrorism in the United States or elsewhere; and

 

  costs associated with legal proceedings, including legal fees and any adverse judgements or settlements.

 

A significant portion of our software revenue in any quarter depends on orders booked and shipped in the last month, weeks or days of that quarter. Many of our customers are large businesses, and if an order from one or more of these large customers does not occur or is deferred, our revenue in that quarter could be substantially reduced, and we may be unable to proportionately reduce our operating expenses during a quarter in which this occurs.

 

18


Table of Contents

Our operating expenses are based on our expectations of future revenue and are relatively fixed in the short term. We plan to increase our operating expenses. If our revenue does not increase commensurate with those expenses, net income in a given quarter could be less than expected.

 

If Microsoft successfully delivers expanded systems management software offerings that compete with our products or if the Microsoft technologies upon which our products are dependent become incompatible with our products or lose market share, the demand for our Microsoft-based products would suffer.

 

Microsoft has delivered expanded offerings in the systems management software market that compete with our products and has announced its intention to continue to deliver expanded offerings in the systems management software market that may compete with our products. Microsoft has substantially greater financial, technical and marketing resources, a larger customer base, a longer operating history, greater name recognition and more established relationships in the industry than we do. If Microsoft gains significant market share in the systems management market with competing products, our ability to achieve sufficient market penetration to grow our business may be impaired and the demand for our products would suffer. In addition, the possible perception among our customers and potential customers that Microsoft is going to be successful in marketing expanded systems management software offerings that compete with our products may delay or change their buying decisions and limit our ability to increase market penetration and grow our business.

 

In addition, many of our products are designed specifically for the Windows platform and designed to use current Microsoft technologies and standards, protocols and application programming interfaces. Although some of our products work on other platforms, such as UNIX, Linux, Macintosh and Palm, we believe that the integration between our products and Microsoft’s products is one of our key competitive advantages. If Microsoft promotes technologies and standards, protocols and application programming interfaces that are incompatible with our technology, or promotes and supports existing or future products offered by our competitors that compete with our products, the demand for our products would suffer. In addition, our business would be harmed if Microsoft loses market share for its Windows products. We expect many of our products to be dependent on the Windows market for the foreseeable future. Although the market for Windows systems has grown rapidly, this growth may not continue at the same rate, or at all. If the market for Windows systems declines or grows more slowly than we anticipate, our ability to increase revenue could be limited.

 

We believe that some of our success has depended, and will continue to depend for the foreseeable future, on our ability to continue as a complementary software provider for Microsoft’s systems management server, or SMS. Because we do not have any long-term arrangements with Microsoft, we cannot be certain that our relationship with Microsoft will continue or expand. Any deterioration of our overall relationship with Microsoft could materially harm our business and affect our ability to develop, market and sell our products.

 

Any deterioration of our relationships with HP could adversely affect our ability to develop, market, and sell our products and impair or eliminate a substantial revenue source.

 

We have generated a substantial portion of our revenue as a result of our relationships with HP. An important part of our operating results depends on our relationships with HP. The loss of significant revenue from HP would negatively impact our results of operations. HP accounted for approximately 27% of our revenue in 2003 and approximately 32% of our revenue in the first nine months of 2004. We have a license and distribution agreement with HP under which HP distributes our products to customers directly or through HP’s distributors and resellers. We also have an agreement with HP to develop and market an integrated product combining our server deployment and provisioning technology with HP servers. If either of these agreements were terminated, our business would be harmed.

 

In addition, HP recently acquired a number of software companies that offer products that compete or in the future may compete with some of our products. If HP continues to expand its software offerings through acquiring companies in our market, the level of revenue we derive through our relationship with HP could decline in the future and our growth prospects could be impaired. In addition, if HP decides to market its acquired products exclusively or otherwise significantly reduce or eliminate its marketing of our competitive products as an alternative solution for its customers, our ability to grow our HP customer business would likely be adversely affected. Furthermore, if our HP customer base perceives that such acquisitions or HP’s marketing strategies regarding its acquired products adversely affect our relationship with HP, our ability to grow our HP customer business could be adversely affected and a substantial revenue source could be impaired.

 

Any deterioration in our overall relationship with HP would harm our business and adversely affect our ability to develop, market and sell our products, grow our revenue or sustain profitability.

 

If we do not continue to execute on our relationship with Dell, our ability to market and sell our products through Dell will be limited and a substantial revenue source will be impaired or eliminated.

 

An important part of our operating results depends on our relationship with Dell. The loss of significant revenue opportunities with Dell could negatively impact our results of operations. Dell accounted for approximately 15% of our revenue in 2003 and 24% of our revenue in the first nine months of 2004. We have a software licensing agreement with Dell under which Dell has been granted a nonexclusive license to distribute certain of our software products and services to third parties. Any deterioration in our relationship with Dell could adversely affect our ability to grow our business and impair a substantial revenue source.

 

We face strong competitors that have greater market share than we do and pre-existing relationships with our potential customers, and if we are unable to compete effectively, we might not be able to achieve sufficient market penetration to sustain profitability.

 

The market for IT lifecycle management products and services is rapidly evolving and highly competitive, and we expect competition in this market to persist and intensify. For example, in recent periods, Microsoft has expanded its product offerings in the systems management market and we expect Microsoft to continue to expand its presence in this market. We may not have the resources or expertise to compete successfully in the future. Many of our competitors have substantially greater financial, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. If our competitors maintain significant market share, we might not be able to achieve sufficient market penetration to grow our business, and our operating results could be harmed.

 

There has been consolidation in our markets, which we believe will continue and could lead to increased price competition and other forms of competition. Established companies such as HP and Symantec have recently acquired companies that compete in our markets and may continue to acquire or establish cooperative relationships with our other competitors. Such established companies may also develop or expand upon their own systems management software. In addition, we may face competition in the future from large established companies, as well as from emerging companies, that have not previously entered the market for IT lifecycle management software or that currently do not have products that directly compete with our products. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We may not be able to compete successfully against current or future competitors, and this would impact our revenue adversely and cause our business to suffer.

 

In addition, existing and potential competitors could elect to bundle their products with, or incorporate systems management software into, products developed by themselves or others. Developers of software products with which our products must be compatible to operate could change their products so that they will no longer be compatible with our products. If our competitors were to bundle their products in this manner or make their products incompatible with ours, this could harm our ability to sell our products and could lead to price reductions for our products, which would likely reduce our profit margins.

 

We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.

 

Our growth is dependent on, among other things, market growth, our ability to enhance our existing products and our ability to introduce new products on a timely basis. As part of our strategy, we intend to continue to make investments in or acquire complementary companies, products, technologies and personnel. We have acquired and integrated technologies from HP, BridgeWater Technologies, Computing Edge, FSLogic, Previo, Tekworks and Wise Solutions. Acquisitions involve difficulties and risks to our business, including, but not limited to, the following:

 

  potential adverse effects on our operating results from increases in goodwill amortization, acquired in-process technology, stock compensation expense, increased compensation expense resulting from newly hired employees, and other expenses associated with integrating new technologies, personnel and business operations;

 

19


Table of Contents
  failure to integrate acquired technologies with our existing products and technologies;

 

  failure to integrate management information systems, personnel, research and development and marketing, sales and support operations;

 

  potential loss of key employees from the acquired company;

 

  diversion of management’s attention from other business concerns;

 

  disruption of our ongoing business;

 

  incurring significant expenses in evaluating the adequacy of and integrating the acquired company’s internal financial controls;

 

  potential loss of the acquired company’s customers;

 

  failure to realize the potential financial or strategic benefits of the acquisition;

 

  failure to successfully further develop the acquired company’s technology, resulting in the impairment of amounts capitalized as intangible assets;

 

  diminishing the value of the Altiris brand or reputation if an acquisition is not successful; and

 

  unanticipated costs and liabilities, including significant liabilities that may be hidden or not reflected in the final acquisition price.

 

Acquisitions may also cause us to:

 

  issue common stock that would dilute our current stockholders’ percentage ownership;

 

  assume liabilities;

 

  record goodwill and non-amortizable intangible assets that would be subject to impairment testing on a regular basis and potential periodic impairment charges;

 

  incur amortization expenses related to certain intangible assets;

 

  incur large and immediate write-offs, and restructuring and other related expenses; or

 

  become subject to litigation.

 

Mergers and acquisitions of technology companies are inherently risky, and we cannot give any assurance that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. If we fail to integrate successfully any future acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could decline. Any integration process will require significant time and resources, and we may not be able to manage the process successfully. If our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our products. We may not successfully be able to evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products or the technologies and intellectual property from which the products are derived.

 

Additionally, we may have to incur debt or issue equity securities to pay for any future acquisition, either of which could affect the market price of our common stock. The sale of additional equity or convertible debt could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

 

If we do not expand our indirect distribution channels, we will have to rely more heavily on our direct sales force to develop our business, which could limit our ability to increase revenue and grow our business.

 

Our ability to sell our products into new markets and to increase our penetration into existing markets will be impaired if we fail to expand our indirect distribution

 

20


Table of Contents

channels and sales force. Our indirect sales channels generated approximately 82% of our revenue in 2003 and approximately 86% of our revenue in the first nine months of 2004. Our sales strategy requires that we establish multiple indirect marketing channels in the United States and internationally through computer manufacturers, OEMs, VARs, systems integrators and distributors, and that we increase the number of customers licensing our products through these channels. Our ability to establish relationships with additional computer manufacturers will be adversely affected to the extent that computer manufacturers decide not to enter into relationships with us because of our existing relationships with other computer manufacturers with which they compete. In addition, the establishment or expansion of our relationships with computer manufacturers may cause other computer manufacturers with which we have relationships to reduce the level of business they conduct with us or even terminate their relationships with us, either of which would adversely affect our revenue and our ability to grow our business. Moreover, our channel partners must market our products effectively and be qualified to provide timely and cost effective customer support and service, which requires us to provide proper training and technical support. If our channel partners do not effectively market, sell and support our products or choose to place greater emphasis on products offered by our competitors, our ability to grow our business and sell our products will be negatively affected.

 

We also plan to continue to expand our direct sales efforts worldwide and invest substantial resources toward this expansion. Despite these efforts, we may experience difficulty in recruiting and retaining qualified sales personnel. Because we rely heavily on our sales organizations, any failure to expand these organizations with qualified personnel could limit our ability to sell our products. In addition, new sales personnel can require up to several months to begin to generate revenue from the sale of our products. As a result, our operating results may be adversely affected to the extent we incur significant expenses on hiring and retaining new sales personnel who do not begin to generate revenue within several months or at all.

 

If our existing customers do not purchase additional licenses or renew annual upgrade protection, our sources of revenue might be limited to new customers and our ability to grow our business might be impaired.

 

Historically, we have derived, and plan to continue to derive, a significant portion of our total revenue from existing customers who purchase additional products and renew AUP. Sales to existing customers represented 69% of our revenue in 2003 and in the first nine months of 2004. If our customers do not purchase additional products or renew AUP, our ability to increase or maintain revenue levels could be limited. Most of our current customers initially license a limited number of our products for use in a division of their enterprises. We actively market to these customers to have them license additional products from us and increase their use of our products on an enterprise-wide basis. Our customers may not license additional products and may not expand their use of our products throughout their enterprises. In addition, as we deploy new versions of our products or introduce new products, our current customers may not require or desire the functionality of our new products and may not ultimately license these products.

 

We also depend on our installed customer base for future revenue from AUP renewal fees. The terms of our standard license arrangements provide for a one-time license fee and a prepayment for one year of AUP. AUP is renewable annually at the option of our customers and there are no minimum payment obligations or obligations to license additional software.

 

If we experience delays in developing our products, our ability to deliver product releases in a timely manner and meet customer expectations will be impaired.

 

We have experienced delays in developing new versions and updating releases of our products, including our recent release of the Altiris 6.0 infrastructure products, and may experience similar or more significant product delays in the future. To date, none of these delays has materially harmed our business. If we are unable, for technological or other reasons, to develop and introduce new and improved products or enhanced versions of our existing products in a timely manner, our business and operating results could be harmed. Difficulties in product development, product localization or integration of acquired or licensed technologies could delay or prevent the successful introduction, marketing and delivery of new or improved products to our customers, damage our reputation in the marketplace and limit our growth.

 

If we fail to manage effectively the significant growth in our business, then our infrastructure, management and resources might be strained and our ability to manage our business could be diminished.

 

Our historical growth has placed, and any further growth is likely to continue to place, a significant strain on our resources. We have grown from 26 employees on December 31, 1998 in two offices worldwide, to 673 employees as of September 30, 2004 in 16 offices worldwide. To manage our continued growth and geographically dispersed organization, we expect to continue to expand or otherwise improve our internal systems, including our management information systems, customer relationship and support systems, and operating, administrative and financial systems and controls. This effort may cause us to make significant capital expenditures or incur significant expenses, and divert the attention of management, sales, support and finance personnel from our core business operations, either of which may adversely affect our financial performance in one or more quarters. Moreover, our growth has resulted, and any future growth will result, in increased responsibilities of management personnel. Managing this growth will require substantial resources that we may not have or otherwise be able to obtain. If we fail to implement or maintain internal systems that enable us to effectively manage our growing business and operations worldwide, our financial results in any given period may be adversely impacted and our business and financial condition could be materially harmed.

 

If the market for IT lifecycle management software does not continue to develop as we anticipate, the demand for our products might be adversely affected.

 

We believe that historically many companies have addressed their IT lifecycle management needs for systems and applications internally and have only recently become aware of the benefits of third-party software products such as ours as these needs have become more complex. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party IT lifecycle management software products and their deployment of these products on an enterprise-wide basis.

 

Unfavorable economic conditions and reductions in IT spending could limit our ability to grow our business.

 

Our business and operating results are subject to the effects of changes in general economic conditions. Although there are indications that economic conditions are improving, at least in the United States, we are still experiencing the effect of the recent severe downturn in the worldwide economy and we are uncertain as to future economic conditions. This uncertainty persists because of the potential long-term impact of terrorist attacks, such as the attacks on the United States on September 11, 2001, and the resulting military actions against terrorism. In the future, concerns about global recession, war and additional acts of terrorism may continue to impact global economies negatively. If these concerns continue or worsen, demand for our products and services may be reduced as a result of even further reduced spending on IT products such as ours.

 

Our industry changes rapidly due to evolving technological standards, and our future success will depend on our ability to continue to meet the sophisticated and changing needs of our customers.

 

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging technologies, including technologies related to the development of Windows and other operating systems generally. If we do not enhance our products to meet these evolving needs, we may not remain competitive and be able to grow our business.

 

We will have to develop and introduce enhancements to our existing products and any new products on a timely basis to keep pace with technological developments, evolving industry standards, changing customer requirements and competitive products that may render existing products and services obsolete. In addition, because our products are dependent upon Windows and other operating systems, we will need to continue to respond to technological advances in these operating systems, including major revisions. Our position in the market for IT lifecycle management software for Windows and other systems and applications could be eroded rapidly by our competitors’ product advances. Consequently, the lifecycles of our products are difficult to estimate. We expect that our product development efforts will continue to require substantial investments, and we may lack the necessary resources to make these investments on a timely basis.

 

21


Table of Contents

Our product sales cycles for large enterprise-wide sales often last in excess of three months and are unpredictable and our product sales cycles for sales to large businesses are typically longer than the sales cycles to small businesses, both of which make it difficult to forecast our revenues and results of operations for any given period.

 

We have traditionally focused our sales efforts on the workgroups and divisions of our customers, resulting in a sales cycle ranging between 30 and 90 days or even longer. We are continually increasing our efforts to generate enterprise-wide sales, which often have sales cycles that extend beyond that experienced with sales to workgroups or divisions. In addition, our sales to larger enterprises have increased in recent periods. If we do not correctly forecast the timing of our sales in a given period, the amount of revenue we recognize in that period could be negatively impacted, which could negatively affect our operating results. In addition, the failure to complete sales, especially large, enterprise-wide sales, in a particular period could significantly reduce revenue in that period, as well as in subsequent periods over which revenue for the sale would likely be recognized. The sales cycle associated with the purchase of our products is subject to a number of significant risks over which we have little or no control, including:

 

  customers’ budgetary constraints, internal acceptance requirements and procurement procedures;

 

  concerns about the introduction or announcement of our competitors’ new products;

 

  announcements by Microsoft relating to Windows; and

 

  potential downturns in the IT market and in economic conditions generally.

 

Errors in our products and product liability claims asserted against us could adversely affect our reputation and business and result in unexpected expenses and loss of market share.

 

Because our software products are complex, they may contain errors or “bugs” that can be detected at any point in a product’s lifecycle. While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs, errors in our products may be found in the future even after our products have been commercially introduced. Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. In the past, we have discovered errors in our products and have experienced delays in the shipment of our products during the period required to correct these errors. Product errors could harm our business and have a material adverse effect on our results of operations. Moreover, because our products primarily support other systems and applications, such as Windows, any software errors or bugs in the operating systems or applications may result in errors in the performance of our software, and it may be difficult or impossible to determine where the errors reside.

 

In addition, we may be subject to claims for damages related to product errors in the future. While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim could harm our business, result in unexpected expenses and damage our reputation. Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. Our standard software licenses provide that if our products fail to meet the designated standard, we will correct or replace such products or refund fees paid for such products. Our standard agreements in many jurisdictions also provide that we will not be liable for indirect or consequential damages caused by the failure of our products. However, such warranty and limitation of liability provisions are not effective under the laws of certain jurisdictions. Although no product liability suits have been filed to date, the sale and support of our products entails the risk of such claims.

 

We rely on our intellectual property rights, and our inability to protect these rights could impair our competitive advantage, divert management attention, require additional development time and resources or cause us to incur substantial expense to enforce our rights, which could harm our ability to compete and generate revenue.

 

Our success is dependent upon protecting our proprietary technology. We rely primarily on a combination of copyright, patent, trade secret and trademark laws, as well as confidentiality procedures and contractual provisions to protect our proprietary rights. These laws, procedures and provisions provide only limited protection. We currently own five patents. However, our patents may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. In addition, patents may not be issued on our current or future technologies. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In particular, we may provide our licensees with access to proprietary information underlying our licensed products which they may improperly appropriate. Additionally, our competitors may independently design around patents and other proprietary rights we hold.

 

Policing unauthorized use of software is difficult and some foreign laws do not protect our proprietary rights to the same extent as United States laws. We believe litigation has been necessary and that it may be necessary in the future to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. Litigation has resulted, and we expect that it will increasingly result, in substantial costs and diversion of resources and management attention.

 

If third parties assert that our products or technologies infringe their intellectual property rights, our reputation and ability to license or sell our products could be harmed. In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights.

 

We expect that software product developers, such as ourselves, will increasingly be subject to infringement claims, whether the claims have merit or not, as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlap. We are currently involved in litigation with Symantec Corporation and Powerquest Corporation regarding our intellectual property and products. Also, third parties notify us from time to time that our products may infringe their proprietary rights. If such notice evolves into a formal claim or litigation, there would be costs associated with defending such claims, whether the claims have merit or not, which could harm our business. Any such claims could also harm our relationships with existing customers and may deter future customers from licensing our products. In addition, in any current or potential dispute involving our intellectual property, our customers or distributors of our products could also become the target of litigation, which could trigger our indemnification obligations in certain of our license and service agreements. Any such claims, with or without merit, could be time consuming, result in costly litigation, including costs related to any damages we may owe resulting from such litigation, cause product shipment delays or result in loss of intellectual property rights which would require us to obtain licenses which may not be available on acceptable terms or at all.

 

We are subject to risks inherent in doing business internationally that could impair our ability to expand into foreign markets.

 

Sales to international customers represented approximately 33% of our revenue in 2003 and approximately 33% of our revenue in the first nine months of 2004. Our international revenue is attributable principally to sales to customers in Europe and Asia Pacific. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could harm our business, including the following:

 

  longer payment cycles;

 

22


Table of Contents
  seasonal reductions in business activity in certain foreign countries, such as the summer months in Europe;

 

  increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;

 

  limited or unfavorable intellectual property protection in certain foreign countries;

 

  unfavorable laws that increase the risks of doing business in certain foreign countries;

 

  fluctuations in currency exchange rates;

 

  increased administrative expenses;

 

  the possible lack of financial and political stability in foreign countries that prevent overseas sales and growth;

 

  restrictions against repatriation of earnings from our international operations;

 

  potential adverse tax consequences; and

 

  difficulties in staffing and managing international operations, including the difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs.

 

Fluctuations in the value of foreign currencies could result in currency transaction losses.

 

As we expand our international operations, we expect that our international business will continue to be conducted in foreign currencies. Fluctuations in the value of foreign currencies relative to the United States Dollar have caused, and we expect such fluctuations to continue to increasingly cause, currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future. To date, we have not adopted a hedging program to protect us from risks associated with foreign currency fluctuations.

 

International political instability may increase our cost of doing business and disrupt our business.

 

Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, sustained police or military action in Afghanistan and Iraq, strained international relations with North Korea, tensions between Taiwan and China, tensions between India and Pakistan and other conflicts in the Middle East and Asia, may halt or hinder our ability to do business, increase our costs and adversely affect our stock price. This increased instability may, for example, negatively impact the reliability and cost of transportation, negatively affect the desire of our employees and customers to travel, adversely affect our ability to obtain adequate insurance at reasonable rates or require us to take extra security precautions for our domestic and international operations. In addition, this international political instability has had and may continue to have negative effects on financial markets, including significant price and volume fluctuations in securities markets. If this international political instability continues or escalates, our business and results of operations could be harmed and the market price of our common stock could decline.

 

If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted.

 

Our future success will depend to a significant extent on the continued service of our executive officers and certain other key employees. Of particular importance to our continued operations are our President and Chief Executive Officer, Greg Butterfield, and our Chief Technology Officer, Dwain Kinghorn. None of our executive officers are bound by an employment agreement and a substantial amount of the stock options granted to our executive officers have vested. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decide to join a competitor or otherwise compete directly or indirectly with us, our business could be harmed. Searching for replacements for our key personnel could divert management’s time and result in increased operating expenses.

 

If we cannot continually attract and retain sufficient and qualified management, technical and other personnel, our ability to manage our business successfully and commercially introduce products could be negatively affected.

 

Our future success will depend on our ability to attract and retain experienced, highly qualified management, technical, research and development, and sales and marketing personnel. The development and sales of our products could be impacted negatively if we do not attract and retain these personnel. Competition for qualified personnel in the computer software industry is intense, and in the past we have experienced difficulty in recruiting qualified personnel, especially technical and sales personnel. Moreover, we intend to expand the scope of our international operations and these plans will require us to attract experienced management, sales, marketing and customer support personnel for our international offices. We expect competition for qualified personnel to remain intense, and we may not succeed in attracting or retaining these personnel. In addition, new employees generally require substantial training in the use of our products, which will require substantial resources and management attention.

 

Future changes in accounting standards, particularly changes affecting revenue recognition and accounting for stock options, and other new regulations could cause unexpected revenue or earnings fluctuations.

 

Future changes in accounting standards, particularly changes affecting revenue recognition and accounting for stock options, could require us to change our accounting policies. These changes could cause deferment of revenue recognized in current periods to subsequent periods or accelerate recognition of deferred revenue to current periods, each of which could cause shortfalls in meeting securities analysts’ and investors’ expectations. Any of these shortfalls could cause a decline in our stock price.

 

Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with Altiris. The Financial Accounting Standards Board, or FASB, among other agencies and entities, has proposed changes to GAAP that, if implemented, would require us to record an additional charge to earnings for employee stock option grants. This proposal would negatively impact our earnings. For example, recording charges for employee stock options under SFAS 123, “Accounting for Stock-Based Compensation” would have increased our net loss by $3.3 million in 2002, decreased our net income by $8.1 million in 2003, and decreased our net income by $11.4 million in the nine months ended September 30, 2004. In addition, new regulations proposed by The Nasdaq National Market requiring stockholder approval in connection with stock option plans has already made it more difficult for us to provide stock options to employees. To the extent that new regulations also make it more expensive to grant options to employees, we may incur increased accounting compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

 

Changes in securities laws and regulations have increased our costs, and if significant, could diminish our profitability.

 

We will continue to incur significant legal, accounting and other expenses to comply with new regulatory requirements. The Sarbanes-Oxley Act of 2002, together with new rules implemented by the SEC and Nasdaq, has required and will require us to make changes in our corporate governance, public disclosure and compliance practices. These additional rules and regulations have increased and will continue to increase our legal and financial compliance costs, and have made some activities more difficult, such as stockholder approval of any new stock option plans. In addition, we expect to incur significant costs in connection with ensuring that we are in

 

23


Table of Contents

compliance with rules promulgated by the SEC regarding internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. These costs may include additional expenses incurred in implementing changes to our IT systems, if we determine changes to our systems are required. These regulatory requirements may in the future make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result; however, if these costs prove significant, they could diminish our profitability.

 

If we fail to implement and maintain adequate internal systems and effective internal control over financial reporting, our ability to manage our business and provide reliable financial reporting could be impaired and our management and auditors may be precluded from certifying effective internal control over financial reporting, which could harm our business reputation and cause our stock price to decline.

 

From time to time, in our ongoing effort to improve business and operational processes and our internal control over financial reporting, we or our auditors have determined and may in the future determine that “significant deficiencies” or “material weaknesses” (as such terms are defined under PCAOB accounting standards) exist or that our internal control over financial reporting may otherwise require improvement. As disclosed under Item 4 - Controls and Procedures in this Form 10-Q, during the quarter ended September 30, 2004, we experienced internal systems errors related to an implementation of a new license management portal, which delayed the shipping of license keys on orders received late in the quarter. In connection with our evaluation of changes to our internal control over financial reporting required under SEC rules promulgated pursuant to The Sarbanes-Oxley Act of 2002, and in the process of investigating these systems errors, management identified certain control deficiencies in our internal control over financial reporting relating to the systems errors, including control deficiencies involving the lack of: (i) restrictions on access to effect development level changes to our financial systems and applications in a production environment, and (ii) limitations on user access into our financial systems, applications and data. Since identifying these control deficiencies, we have taken steps, and we may yet identify additional steps, to make improvements to our internal control over financial reporting that we believe will remediate these control deficiencies and enhance the reliability of our internal control over financial reporting.

 

Pursuant to the Sarbanes-Oxley Act of 2002 and rules of the SEC promulgated pursuant to that act, our management will be required to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2004, and we are required to disclose management’s assessment of the effectiveness of our internal control over financial reporting, including any material weakness in our internal control over financial reporting. If our management concludes that there are one or more material weaknesses in our internal control over financial reporting, our management will not be permitted to conclude that our internal control over financial reporting is effective. It is possible that the reportable condition and control deficiencies identified above or other control deficiencies, either individually or in combination, constitute material weaknesses in our internal control over financial reporting. As a result, if we fail to adequately remediate these deficiencies before December 31, 2004, and if management or our auditors conclude that they give rise to or otherwise constitute material weaknesses, our management will not be permitted to conclude that our internal control over financial reporting is effective. In such a case, investors may lose confidence in the reliability of our financial reporting, which may harm our business reputation and cause our stock price to decline.

 

Moreover, if significant deficiencies or material weaknesses exist in our internal control over financial reporting, including those which we have previously identified and have sought or are seeking to remediate, our ability to reliably provide financial statements in accordance with GAAP could be impaired, which would lead to a loss of investor and customer confidence and a sustained material decline in our stock price.

 

The market price for our common stock may be particularly volatile, and our stockholders may be unable to resell their shares at a profit.

 

The market price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline. Since our initial public offering in May 2002, the price of our common stock has ranged from an intra-day low of $4.50 to an intra-day high of $39.20. The stock markets have experienced significant price and trading volume fluctuations. The market for technology stocks has been extremely volatile and frequently reaches levels that bear no relationship to the past or present operating performance of those companies. General economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, could negatively affect the market price of our common stock. In addition, our operating results may be below the expectations of securities analysts and investors. If this were to occur, the market price of our common stock would likely significantly decrease. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of management’s attention and resources.

 

The market price of our common stock may fluctuate in response to various factors, some of which are beyond our control. These factors include, but are not limited to, the following:

 

  changes in market valuations or earnings of our competitors or other technology companies;

 

  actual or anticipated fluctuations in our operating results;

 

  changes in financial estimates or investment recommendations by securities analysts who follow our business;

 

  technological advances or introduction of new products by us or our competitors;

 

  the loss of key personnel;

 

24


Table of Contents
  our sale of common stock or other securities in the future;

 

  public announcements regarding material developments in our business, including acquisitions or other strategic transactions;

 

  public announcements regarding material transactions or other developments involving our strategic partners, customers or competitors that are perceived by the market to affect our business prospects;

 

  intellectual property or litigation developments;

 

  changes in business or regulatory conditions;

 

  the trading volume of our common stock; and

 

  disruptions in the geopolitical environment, including war in the Middle East or elsewhere or acts of terrorism in the United States or elsewhere.

 

We have implemented anti-takeover provisions that could make it more difficult to acquire us.

 

Our certificate of incorporation, our bylaws and Delaware law contain provisions that may inhibit potential acquisition bids for us and prevent changes in our management. Certain provisions of our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction. In addition, we have agreements with strategic partners that contain provisions which in the event of a change of control allow such partners to terminate the agreements. These provisions of our charter documents and agreements could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent changes in our management.

 

These provisions include:

 

  authorizing only the Chairman of the board of directors, the Chief Executive Officer or the President of Altiris to call special meetings of stockholders;

 

  establishing advance notice procedures with respect to stockholder proposals and the nomination of candidates for election of directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors;

 

  prohibiting stockholders action by written consent;

 

  classifying our board of directors into three classes so that the directors in each class will serve staggered three-year terms;

 

  eliminating cumulative voting in the election of directors; and

 

  authorizing the issuance of shares of undesignated preferred stock without a vote of stockholders.

 

    ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and marketable securities, trade accounts receivable, accounts payable and short and long-term obligations. We consider investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short and long-term obligations. Thus, fluctuations in interest rates would not have a material impact on the fair value of these securities.

 

Our business is principally transacted in United States Dollars. During the year ended December 31, 2003, approximately 33% of the U.S. dollar value of our invoices were denominated in currencies other than the United States Dollars. During the nine months ended September 30, 2004, approximately 28% of the U.S. dollar value of our invoices were denominated in currencies other than the United States Dollar. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to local currency denominated revenue and operating expenses in Australia, Estonia, France, Germany, The Netherlands, Singapore, Sweden, Switzerland, Japan and the United Kingdom. We believe that a natural hedge exists in local currencies, as local currency denominated revenue will substantially offset the local currency denominated operating expenses. We will continue to assess our need to hedge currency exposures on an ongoing basis. However, as of September 30, 2004, we had no hedging contracts outstanding. At September 30, 2004, we had $171.4 million in cash and available-for-sale securities. A hypothetical 10% increase or decrease in interest rates would not have a material impact on our results of operations, or the fair market value or cash flows of these instruments.

 

    ITEM 4. CONTROLS AND PROCEDURES

 

We maintain “disclosure controls and procedures” within the meaning of Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures, or Disclosure Controls, are designed to ensure that information required to be disclosed by Altiris in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.

 


Table of Contents

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), we evaluated the effectiveness of the design and operation of our Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Included on Exhibits 31.1 and 31.2 of this Quarterly Report of Form 10-Q are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our Disclosure Controls were effective to ensure that material information relating to Altiris and its consolidated subsidiaries would be made known to them by others within those entities.

 

Changes in Internal Control over Financial Reporting. In our ongoing effort to improve business and operational processes, we developed a new license management portal (“LMP”) that automates the generation and delivery of license keys based on orders received and processed. The LMP went into production during the quarter ended September 30, 2004. The implementation of the LMP during the quarter led to internal systems errors that delayed the shipping of license keys on orders received late in the quarter, which resulted in a deferral of license revenue to the following quarter. This implementation, with the resulting systems errors, materially affected our “internal control over financial reporting” (as defined under Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended) during the quarter. In connection with our evaluation of changes to our internal control over financial reporting required by Rule 15d-15(d) of the Exchange Act, and in the process of investigating the systems errors, management has identified certain control deficiencies in our internal control over financial reporting relating to the systems errors, including control deficiencies involving the lack of: (i) restrictions on access to effect development level changes to our financial systems and applications in a production environment, and (ii) limitations on user access into our financial systems, applications and data. Since identifying these control deficiencies, we have taken steps, and we may yet identify additional steps, to make improvements to our internal control over financial reporting that we believe will remediate these control deficiencies and enhance the reliability of our internal control over financial reporting.

 

Pursuant to the Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission promulgated pursuant to that act, our management will be required to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2004, and we are required to disclose management’s assessment of the effectiveness of our internal control over financial reporting, including any “material weakness” (within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2) in our internal control over financial reporting. If our management concludes that there are one or more material weaknesses in our internal control over financial reporting, our management will not be permitted to conclude that our internal control over financial reporting is effective. It is possible that the control deficiencies identified above or other control deficiencies, either individually or in combination, constitute “significant deficiencies” (within the meaning of PCAOB Auditing Standard No. 2) or material weaknesses in our internal control over financial reporting. As a result, if we fail to adequately remediate these control deficiencies before December 31, 2004, and if management or our auditors conclude that they give rise to or otherwise constitute material weaknesses, our management will not be permitted to conclude that our internal control over financial reporting is effective.

 

26


Table of Contents

PART II. OTHER INFORMATION

 

    ITEM 1. LEGAL PROCEEDINGS

 

On December 23, 1999, we commenced a patent infringement suit against Symantec Corporation, or Symantec, in the United States District Court for the District of Utah, or District Court, requesting compensatory damages and injunctive relief. In its response to our complaint, Symantec denied our claim of infringement and brought a counterclaim against us asserting that our patent is invalid and that we are infringing and diluting Symantec’s trademarks.

 

In July 2001, the District Court conducted a hearing for the purpose of construing or interpreting the claims comprising our patent, and in August 2001, the District Court issued an order that narrowly construed these claims. In an effort to facilitate our appeal from the order, we entered into a stipulation with Symantec that, based on the order, Symantec’s products do not infringe our patent. The stipulation also provided that Symantec’s counterclaims of trademark infringement and dilution would be dismissed and the remainder of the lawsuit would be stayed. Symantec’s only remaining counterclaim requests a judgment that our patent is invalid.

 

In November 2001, the District Court entered a final judgment based on our stipulation, ruling that Symantec did not infringe our patent and dismissing Symantec’s counterclaims for trademark infringement and dilution. We and Symantec each appealed the District Court’s ruling to the United States Court of Appeals for the Federal Circuit, or Court of Appeals, and on February 12, 2003, the Court of Appeals ruled that the District Court erred in its construction of the claims comprising our patent and instructed the District Court to reconsider the question of infringement by Symantec based upon the Court of Appeal’s interpretation of the patent. Although management believes that this patent is an important intellectual property asset, management does not believe that it is material to our business as a whole. Accordingly, management does not believe that an adverse ruling would have a material adverse effect on our results of operations or financial position.

 

In April 2004, Symantec and its wholly owned subsidiary, PowerQuest Corporation, or PowerQuest, jointly commenced a patent infringement suit against the Company in the United States District Court for the Eastern District of Texas, requesting compensatory damages and injunctive relief. Symantec and PowerQuest initially claimed that the Company is infringing one of Symantec’s patents and two of PowerQuest’s patents. In August 2004, Symantec and PowerQuest amended its complaint and dismissed one of the infringement claims without prejudice. In its answers to the original complaint and amended complaint, the Company has denied the claims of infringement and brought a counterclaim asserting that the patents in question are invalid and that Symantec is infringing two of the Company’s patents. The Company intends to vigorously defend against the claims made by Symantec and PowerQuest and prosecute its counterclaims against Symantec.

 

In June 2003, InstallShield Software Technologies, Inc., or InstallShield, filed suit against Wise Solutions, Inc., or Wise Solutions, in the United States District Court for the Northern District of Illinois Eastern Division. In December 2003, the Company acquired Wise Solutions by means of a merger transaction, with Wise Solutions surviving as the Company’s wholly owned subsidiary. InstallShield claimed that its suit arose out of a criminal investigation of Wise Solutions conducted by the U.S. Attorney’s office in Chicago, Illinois and the FBI. Management believes the government investigation concerns the same facts and circumstances upon which the civil suit was based. In July 2004, the parties entered into a settlement agreement that resolved all claims made by the parties in the civil litigation, and the Court has dismissed the case with prejudice. The Company accrued for this settlement as of June 30, 2004. In September 2004, the Company received written notice from the U.S. Attorney’s office in Chicago, Illinois, informing the Company that the Chicago office had closed its investigation of Wise Solutions and that it had not filed nor sought to file criminal charges against Wise Solutions.

 

We are involved in other claims and legal matters arising in the ordinary course of business. The ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

 

    ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We completed our initial public offering of 5,000,000 shares of our common stock on May 29, 2002, pursuant to a Registration Statement on Form S-1 (File No. 333-83352), which the SEC declared effective on May 22, 2002. In the offering, we sold an aggregate of 5,000,000 shares of our common stock at a price of $10.00 per share. The aggregate net proceeds of the offering were approximately $43.8 million, after deducting underwriting discounts and commissions and paying offering expenses.

 

We completed a follow-on public offering of 3,750,000 shares of our common stock on August 19, 2003, pursuant to a Registration Statement on Form S-3 (File No. 333-107408), which the SEC declared effective on August 13, 2003. In the offering, we sold an aggregate of 3,750,000 shares of our common stock at a price of $18.75 per share. Also in the offering, a selling stockholder, The Canopy Group, Inc., sold 2,000,000 shares of our common stock.

 

We have used and intend to continue to use the net proceeds of our initial public offering and our follow-on public offering for working capital and general corporate purposes, including expanding our sales efforts, research and development and international operations. In addition, we have used and expect in the future to use a portion of the net proceeds to invest in or acquire complementary businesses, products or technologies. For example, in September of 2002, we acquired certain technology assets from Previo for an aggregate consideration of $1.1 million; in December of 2003, we acquired Wise Solutions for an aggregate consideration of $31.5 million; and in February of 2004, we acquired FSLogic for an aggregate consideration of $0.9 million. Pending use for these or other purposes, we intend to invest the net proceeds of the offering in short-term interest-bearing, investment-grade securities.

 

On August 31, 2004, we issued a total of 29,082 shares of Altiris common stock to former shareholders of Bridgewater, in connection with our purchase of certain assets of Bridgewater. These shares were valued at $23.73 per share as of August 31, 2004, the date we signed the asset purchase agreement with Bridgewater. This issuance was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof on the basis that the transaction did not involve a public offering.

 

We made no repurchase of shares during our quarter ended September 30, 2004.

 

    ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

We held the 2004 Annual Meeting of Stockholders on July 22, 2004 in Lindon, Utah.

 

At the 2004 Annual Meeting of Stockholders, the stockholders elected the following individuals to the Board of Directors to serve until the 2007 Annual Meeting of Stockholders, and until their successors are elected and qualified or until their earlier death, resignation or removal:

 

Name


   Votes For

   Votes Withheld

Michael J. Levinthal    22,021,467    302,577
Mark E. Sunday    21,739,537    584,507

 

Messrs. Butterfield, Filler, Hoag and Roach are each serving a term as a director which continues after the 2004 Annual Meeting of Stockholders.

 

Also, the Altiris, Inc. 2004 Stock Plan was not adopted. There were 8,630,954 votes cast for the adoption of the plan, 13,690,527 votes cast against the plan and 2,563 abstentions. There were no broker non-votes with respect to this matter.

 

Finally, at the 2004 Annual Meeting of Stockholders, the stockholders approved the ratification of the appointment of KPMG LLP as our independent auditors for the 2004 fiscal year. There were 21,938,636 votes cast for the ratification, 383,302 votes cast against the ratification and 2,106 abstentions. There were no broker non-votes with respect to this matter.

 

    ITEM 5. OTHER INFORMATION

 

Our Insider Trading Policy, as amended, allows directors, officers and other employees covered under the policy to establish, under limited circumstances contemplated by Rule 10b5-1 under the Securities Exchange Act of 1934, written programs that permit automatic trading of Altiris stock or trading of Altiris stock by an independent person (such as an investment bank) who is not aware of material, nonpublic information at the time of the trade. As of September 30, 2004, Gregory S. Butterfield, President and Chief Executive Officer and a director of Altiris, and Stephen C. Erickson, Vice President, Chief Financial Officer, were the only executive officers of Altiris who had adopted Rule 10b5-1 trading plans. We believe that additional directors, officers and employees may establish such programs in the future.

 

27


Table of Contents

    ITEM 6. EXHIBITS

 

Exhibit

Number


 

Description of Document


2.1KG   Agreement and Plan of Merger, dated December 1, 2003, by and among the Registrant, Sage Acquisition Corporation, Wise Solutions, the shareholders of Wise Solutions and the shareholders representative.
3.1A   Amended and Restated Certificate of Incorporation of the Registrant currently in effect.
3.2A   Amended and Restated Bylaws of the Registrant currently in effect.
4.1B   Specimen Common Stock Certificate.
4.2B   First Amended and Restated Investors’ Rights Agreement, dated as of May 2, 2002, between Registrant and the Investors (as defined therein).
10.1B   Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2AB   1998 Stock Option Plan.
10.2BB   Form of Option Agreement under the 1998 Stock Option Plan.
10.3AC   2002 Stock Plan, as amended.
10.3BB   Form of Option Agreement under the 2002 Stock Plan.
10.4AN   2002 Employee Stock Purchase Plan, as amended.
10.4BB   Form of Subscription Agreement under the 2002 Employee Stock Purchase Plan.
10.5AB   License and Distribution Agreement, dated August 21, 2001, by and between the Registrant and Compaq Computer Corporation.
10.5A1DE   Amendment No. 1 to Compaq Development Items License Agreement between the Registrant and Compaq Computer Corporation, dated April 25, 2002.
10.5A2GL   Amendment No. 2 to License and Distribution Agreement between the Registrant and Hewlett-Packard Company, dated September 12, 2003.
10.5BB   License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation.
10.5CBGH   Amendment No. 1 to License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation, dated April 20, 2000.
10.5DBGH   Amendment No. 1 to License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation, dated August 11, 2000.
10.5EB   Amendment No. 2 to License and Distribution Agreement, dated November 12, 1999, and to Amendment No. 1, dated April 20, 2000, each by and between the Registrant and Compaq Computer Corporation, dated October 31, 2001.
10.5FBG   Amendment No. 3 to License and Distribution Agreement, dated November 12, 1999, and to Amendments No. 1 and No. 2, between the Registrant and Compaq Computer Corporation, dated December 1, 2001.
10.5GI   Amendment No. 4 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 30, 2003.
10.5HIG   Amendment No. 5 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 30, 2003.
10.5IOG   Amendment No. 6 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated January 1, 2004.
10.5JFP   Amendment No. 7 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 26, 2004.
10.5KFP   Amendment No. 8 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated May 26, 2004.
10.5LFP   Amendment No. 9 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated June 30, 2004.
10.6B   Lease Agreement, dated December 31, 2001, between Canopy Properties, Inc. and Altiris, Inc.
10.6AD   First Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated September 12, 2002.
10.6BD   Second Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated March 31, 2003.
10.6CD   Third Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 20, 2003.
10.6DM   Fourth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated November 1, 2003.

 

28


Table of Contents
10.6EO    Fifth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated January 23, 2004.
10.6FP    Sixth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 5, 2004.
10.6GP    Letter from Canopy Properties, Inc. to the Registrant regarding the Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 21, 2004.
10.7GJ    Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and Altiris, Inc.
10.7AGM    Amendment One to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated June 18, 2003.
10.7BGO    Amendment Two to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated February 28, 2004.
10.7CFP    Amendment Three to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated May 25, 2004.
10.7DF    Amendment Four to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated July 14, 2004. 2004.
10.7EFP    Amendment Five to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated June 9, 2004.
31.1    Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
31.2    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

A Incorporated by reference to exhibits of the same number filed with the registrant’s Form 8A/A (File No. 000-49793) on July 24, 2002.
B Incorporated by reference to exhibits of the same number filed with the registrant’s Registration Statement on Form S-1 (File No. 333-83352), which the Commission declared effective on May 22, 2002.
C Incorporated by reference to exhibits of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on November 13, 2003.
D Incorporated by reference to exhibits of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on July 31, 2003.
E Although Exhibit 10.5A1 is titled “Amendment No. 1 to Compaq Development Items License Agreement,” this agreement amends the License and Distribution Agreement, dated August 21, 2001, by and between the Registrant and Compaq Computer Corporation.
F The registrant has requested confidential treatment from the Commission with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. The omitted information has been filed separately with the Commission.
G The registrant obtained confidential treatment from the Commission with respect to certain portions of this exhibit. Omissions are designated as [*] within the exhibit as filed with the Commission. A complete copy of this exhibit has been filed separately with the Commission.
H Although Exhibit 10.5C and Exhibit 10.5D are each titled “Amendment No. 1 to License and Distribution Agreement,” they are separate exhibits.
I Incorporated by reference to exhibits of the same number filed with the registrant’s Registration Statement on Form S-3 (File No. 333-107408) on July 28, 2003.
J Incorporated by reference to exhibits of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on March 28, 2003.
K Incorporated by reference to exhibit of the same number filed with the registrant’s Current Report on Form 8-K (File No. 000-49793) on December 16, 2003.
L Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on November 13, 2003.
M Incorporated by reference to exhibit of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on March 15, 2004.
N Incorporated by reference to exhibit of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on April 29, 2004.
O Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on May 10, 2004.
P Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on August 9, 2004.

 

29


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    ALTIRIS, INC.

Date: November 9, 2004

 

/S/ STEPHEN C. ERICKSON


    Stephen C. Erickson
    Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

30


Table of Contents

EXHIBIT INDEX

 

Exhibit

Number


  

Description of Document


2.1KG    Agreement and Plan of Merger, dated December 1, 2003, by and among the Registrant, Sage Acquisition Corporation, Wise Solutions, the shareholders of Wise Solutions and the shareholders representative.
3.1A    Amended and Restated Certificate of Incorporation of the Registrant currently in effect.
3.2A    Amended and Restated Bylaws of the Registrant currently in effect.
4.1B    Specimen Common Stock Certificate.
4.2B    First Amended and Restated Investors’ Rights Agreement, dated as of May 2, 2002, between Registrant and the Investors (as defined therein).
10.1B    Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2AB    1998 Stock Option Plan.
10.2BB    Form of Option Agreement under the 1998 Stock Option Plan.
10.3AC    2002 Stock Plan, as amended.
10.3BB    Form of Option Agreement under the 2002 Stock Plan.
10.4AN    2002 Employee Stock Purchase Plan, as amended.
10.4BB    Form of Subscription Agreement under the 2002 Employee Stock Purchase Plan.
10.5AB    License and Distribution Agreement, dated August 21, 2001, by and between the Registrant and Compaq Computer Corporation.
10.5A1DE    Amendment No. 1 to Compaq Development Items License Agreement between the Registrant and Compaq Computer Corporation, dated April 25, 2002.
10.5A2GL    Amendment No. 2 to License and Distribution Agreement between the Registrant and Hewlett-Packard Company, dated September 12, 2003.
10.5BB    License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation.
10.5CBGH    Amendment No. 1 to License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation, dated April 20, 2000.
10.5DBGH    Amendment No. 1 to License and Distribution Agreement, dated November 12, 1999, by and between the Registrant and Compaq Computer Corporation, dated August 11, 2000.
10.5EB    Amendment No. 2 to License and Distribution Agreement, dated November 12, 1999, and to Amendment No. 1, dated April 20, 2000, each by and between the Registrant and Compaq Computer Corporation, dated October 31, 2001.
10.5FBG    Amendment No. 3 to License and Distribution Agreement, dated November 12, 1999, and to Amendments No. 1 and No. 2, between the Registrant and Compaq Computer Corporation, dated December 1, 2001.
10.5GI    Amendment No. 4 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 30, 2003.
10.5HIG    Amendment No. 5 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 30, 2003.
10.5IOG    Amendment No. 6 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated January 1, 2004.
10.5JFP    Amendment No. 7 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated April 26, 2004.
10.5KFP    Amendment No. 8 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated May 26, 2004.
10.5LFP    Amendment No. 9 to License and Distribution Agreement, dated November 12, 1999, between the Registrant and Hewlett-Packard Company, dated June 30, 2004.
10.6B    Lease Agreement, dated December 31, 2001, between Canopy Properties, Inc. and Altiris, Inc.
10.6AD    First Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated September 12, 2002.
10.6BD    Second Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated March 31, 2003.
10.6CD    Third Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 20, 2003.
10.6DM    Fourth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated November 1, 2003.

 

31


Table of Contents
10.6EO    Fifth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated January 23, 2004.
10.6FP    Sixth Amendment to Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 5, 2004.
10.6GP    Letter from Canopy Properties, Inc. to the Registrant regarding the Lease Agreement, dated December 31, 2001, between the Registrant and Canopy Properties, Inc., dated May 21, 2004.
10.7GJ    Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and Altiris, Inc.
10.7AGM    Amendment One to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated June 18, 2003.
10.7BGO    Amendment Two to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated February 28, 2004.
10.7CFP    Amendment Three to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated May 25, 2004.
10.7DF    Amendment Four to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated July 14, 2004.
10.7EFP    Amendment Five to Software License Agreement, dated April 26, 2002, by and between Dell Products, L.P. and the Registrant, dated June 9, 2004.
31.1    Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
31.2    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

A Incorporated by reference to exhibits of the same number filed with the registrant’s Form 8A/A (File No. 000-49793) on July 24, 2002.
B Incorporated by reference to exhibits of the same number filed with the registrant’s Registration Statement on Form S-1 (File No. 333-83352), which the Commission declared effective on May 22, 2002.
C Incorporated by reference to exhibits of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on November 13, 2003.
D Incorporated by reference to exhibits of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on July 31, 2003.
E Although Exhibit 10.5A1 is titled “Amendment No. 1 to Compaq Development Items License Agreement,” this agreement amends the License and Distribution Agreement, dated August 21, 2001, by and between the Registrant and Compaq Computer Corporation.
F The registrant has requested confidential treatment from the Commission with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. The omitted information has been filed separately with the Commission.
G The registrant obtained confidential treatment from the Commission with respect to certain portions of this exhibit. Omissions are designated as [*] within the exhibit as filed with the Commission. A complete copy of this exhibit has been filed separately with the Commission.
H Although Exhibit 10.5C and Exhibit 10.5D are each titled “Amendment No. 1 to License and Distribution Agreement,” they are separate exhibits.
I Incorporated by reference to exhibits of the same number filed with the registrant’s Registration Statement on Form S-3 (File No. 333-107408) on July 28, 2003.
J Incorporated by reference to exhibits of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on March 28, 2003.
K Incorporated by reference to exhibit of the same number filed with the registrant’s Current Report on Form 8-K (File No. 000-49793) on December 16, 2003.
L Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on November 13, 2003.
M Incorporated by reference to exhibit of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on March 15, 2004.
N Incorporated by reference to exhibit of the same number filed with the registrant’s Annual Report on Form 10-K (File No. 000-49793) on April 29, 2004.
O Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on May 10, 2004.
P Incorporated by reference to exhibit of the same number filed with the registrant’s Quarterly Report on Form 10-Q (File No. 000-49793) on August 9, 2004.

 

32

EXHIBIT 10.7D

 

AMENDMENT NUMBER 4 TO SOFTWARE LICENSING AGREEMENT

 

This Amendment Number 4 to Software License Agreement (the “Amendment”), dated July 14, 2004 (the “Effective Date”), amends the terms of the Software License Agreement dated April 26, 2002, including any and all previous amendments thereto (the “Agreement”) by and between Altiris, Inc. (“Licensor”) and Dell Products L.P. (“Dell”). Unless specifically modified or changed herein, the terms and conditions of the Agreement shall remain in effect. In the event of a conflict or inconsistency between the terms and conditions contained in this Amendment and the Agreement, the terms and conditions contained in this Amendment shall prevail. Capitalized terms not specifically defined in this Amendment shall have the meanings set forth in the Agreement.

 

A. The following definitions are added to Section 1 (Definitions).

 

  1.18 Per Use License shall mean a license to use the Per Use Software either to: (i) migrate (i.e., upgrade) a single personal computer from one operating system (and associated applications) to another operating system (with the same and/or new applications), or (ii) migrate (i.e., transfer) user files, directories and desktop, network and application settings on and from a single personal computer to a different personal computer, or (iii) perform an inventory to identify software and/or hardware on a single personal computer. In any case, a license will be used (or “consumed”) upon the completion of one of the above tasks, and a new license will be required (and a new license fee paid) to perform any additional tasks. Dell shall pay the license fee set forth in Exhibit A-4 for each license consumed.

 

  1.19 Per Use Software shall mean the binary code format of the Licensor software products set forth in Exhibit A of this Amendment.

 

  1.20 Managed Services shall mean computer management services (such as hardware support and maintenance, updating and migrating systems including applications, settings and data, and move, add, change, type activity) provided by Dell to a customer pursuant to a written agreement between Dell and such customer.

 

  1.21 Exhibit A-4 shall mean the Exhibit attached hereto to this Amendment that sets forth the Per Use Software and the accompanying license fees.

 

B. The following paragraph is added to Section 2 (Object Code License with Source Code Escrow Provisions).

 

  2.15 Subject to the terms and conditions of this Amendment and Dell’s payment of all license fees due, Licensor grants to Dell and Dell accepts a worldwide, nonexclusive, nontransferable license to use the Per Use Software under a Per Use License for the purpose of providing Managed Services to its customers. Dell shall not use the Per Use Software for any other purpose. Dell may use and copy the written documentation provided with the Per Use Software, if any, but only as reasonably necessary to facilitate the licensed use of the Per Use Software. Certain Per Use Software may have a client component that will need to run on a customer’s computer(s) to perform the Managed Services. Such use shall be permitted and deemed a part of the applicable licenses under this Amendment, provided that such client component and all use and copying thereof are subject to the terms of this Amendment and each customer’s compliance therewith. Dell may sublicense the foregoing license rights to its subcontractors; provided, however, Dell shall remain responsible for payment of all license fees dues hereunder and Dell shall either: (a) enter into written agreements by which such subcontractors will agree to comply with the terms of this Amendment and which entitle Altiris to enforce its terms as a third party beneficiary or in

 

1


the name of Dell, or (b) assume full responsibility for any action of such subcontractor that would constitute a breach of this Amendment to the same extent it is responsible and liable hereunder had it been Dell’s breach.

 

  2.16 Dell shall not: (a) create derivative works of the Per Use Software, or (b) rent, lease, sublicense, timeshare, or allow third parties to copy, access or use the Per Use Software, except as explicitly set forth in this Amendment. Licensor reserves all rights in and to the Per Use Software not expressly permitted in this Amendment. Licensor does not assign ownership of any of its intellectual property under this Amendment.

 

C. The following sections are added to Section 3 (Compensation).

 

  3.5 Within ten (10) days after the end of each calendar month, Dell shall submit to Licensor a report (the “Per Use Report”) in a mutually agreed to form that references this Amendment and contains at least the following information: (i) the Per Use Software licenses consumed during the immediately preceding month and (ii) the applicable license fees due.

 

  3.6 All license fees for the Per Use Software shall be due and payable within thirty days (30) from the end of each Dell fiscal quarter and shall be accompanied by a report indicating the number of Per Use licenses consumed by Dell during the corresponding quarterly period and the corresponding license fee due Licensor.

 

  3.7 Altiris reserves the right to modify or change the license fee of any of the Per Use Software set forth in Exhibit A-4 at the beginning of any Renewal Term (as set forth in Section 9.6). The basis for calculating license fees (e.g., number of nodes, consumption of nodes, users, and so forth) can also be changed by Licensor by a similar notice and may be different for different products of the Per Use Software. Licensor agrees to honor the prior pricing levels for any written quotation or bids Dell has outstanding at the time Dell is notified of any increase in the pricing, but only if an order based on such quotations or bids are placed with Licensor within sixty days of the date that the notice of a price increase is given to Dell. The Parties acknowledge that major customer project opportunities may require the granting of fixed pricing levels for the term of the project, and agree to negotiate in good faith, on a case by case basis, special pricing for those opportunities; however, neither Party is required to accept any special pricing that is unacceptable to it.

 

  3.8 During the term of this Amendment and for a period of two (2) years thereafter, Dell will maintain complete records showing (i) amounts due and paid under this Amendment, and (ii) the use, copying and deployment of the Per Use Software. Licensor will have the right, at its expense and upon a mutually agreed schedule, to audit Dell’s records reflecting use, copying and deployment of the Per Use Software. Any audit may be conducted by Licensor or its authorized representatives, will not interfere unreasonably with Dell’s business activities, and will be conducted no more than once per calendar year, unless a previous audit has disclosed a material discrepancy. If the audit irrefutably shows Dell understated actual use, deployment or copying of the Per Use Software or otherwise underpaid amounts owing, Dell will immediately pay Licensor all amounts owing, subject to Dell’s right at all times to have a full opportunity to refute or correct any such conclusions. Licensor will use information received during an audit solely for the purposes of this Amendment and its enforcement and will otherwise maintain the confidentiality of such information.

 

2


D. The following section is added to Section 5 (Support, Training and Maintenance).

 

  5.6 Nothing in this Amendment entitles Dell to any support for the Per Use Software Any support or other services will be made available to Dell as agreed upon and described in a separate services agreement signed by both Parties.

 

E. The following section is added to Section 9 (Term and Termination of Agreement).

 

  9.6 This Amendment will commence upon its Effective Date and will continue in force for a period of one (1) year (the “Initial Term”), unless earlier terminated for breach as provided herein. Upon the expiration of the Initial Term, this Amendment will automatically renew for successive one (1) year terms (each, a “Renewal Term”) unless and until either party provides at least thirty (30) days’ written notice of non-renewal prior to the end of the term. Without waiving or limiting any rights or remedies, either Party may terminate this Amendment at any time upon providing thirty (30) days’ prior written notice to the other.

 

  9.7 Upon termination of this Amendment, Dell shall immediately: (i) discontinue all use of the Per Use Software licensed hereunder, and (ii) return to Licensor or erase all copies of such Per Use Software. At Licensor’s request, Dell shall provide Licensor with written certification that Dell has complied with (i) and (ii) above. Notwithstanding the foregoing, Dell may continue to use any Per Use Software for which the applicable license fee has been paid but for which a license has not yet been consumed pursuant to Section 1.18. Additionally, in the event Licensor provides written notice of termination of this Amendment under Section 9.6, Licensor shall provide Dell with an opportunity during such thirty (30) day written notice period to make an advance, non-refundable, purchase of additional licenses of the Per Use Software to be used by Dell (or its licensed subcontractors) and consumed during on-going Managed Services projects that will be completed after termination of this Amendment. Termination of this Amendment will not affect any pre-termination obligation of either Party hereunder and any such termination is without prejudice to the enforcement of any un-discharged obligations existing at the time of termination. Regardless of any other provision of this Amendment, neither party will be liable by reason of the termination of this Agreement for compensation, reimbursement, or damages on account of the loss of prospective profits on anticipated sales, or on account of expenditures, investments, leases or other commitments made in connection with such other party’s business or otherwise.

 

  9.8 Sections 2.16, 3.8, 7.1-7.5, 8.1-8.2, 9.7, 10.1-10.2, 11.1 and any other provision of this Amendment which by its nature extends beyond the termination of this Amendment, will survive and remain in effect.

 

G. Sections 2.4, 2.7, 3.5, 7, 8, 10, and 12.13 shall apply to Per Use Software in the same manner that it applies to Licensor Applications.

 

Agreed and Accepted:   Agreed and Accepted:
DELL PRODUCTS L.P.   ALTIRIS, INC.
By:  

/s/ Timothy D. Webb


  By:  

/s/ Rob Wellman


Printed Name:   Timothy D. Webb   Printed Name:   Rob Wellman
Title:   Director, General Procurement   Title:   VP Strategic Alliances
Date:   July 21, 2004   Date:   July 14, 2004
           

  Reviewed by Altiris Legal

  By: Eric Gardanier

  Date: 7/14/04

 

3


EXHIBIT A-4

PER USE SOFTWARE AND FEES

 

[* ]

 


 

[*] This provision is the subject of a Confidential Treatment Request.

 

4

Exhibit 31.1

 

CERTIFICATION

 

I, Gregory S. Butterfield, certify that:

 

1. I have reviewed this quarterly report of Altiris, Inc. on Form 10-Q;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004.

 

/s/ GREGORY S. BUTTERFIELD


Gregory S. Butterfield

President and Chief Executive Officer

Exhibit 31.2

 

CERTIFICATION

 

I, Stephen C. Erickson, certify that:

 

1. I have reviewed this quarterly report of Altiris, Inc. on Form 10-Q;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004.

 

/s/ STEPHEN C. ERICKSON


Stephen C. Erickson

Vice President and Chief Financial Officer

Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

Pursuant to

18 U.S.C. Section 1350,

As Adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

I, Gregory S. Butterfield, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Altiris, Inc. on Form 10-Q for the quarterly period ended September 30, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Altiris, Inc.

 

Date: November 9, 2004  

/s/ GREGORY S. BUTTERFIELD


    Gregory S. Butterfield
   

President and Chief Executive Officer

(Principal Executive Officer)

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

Pursuant to

18 U.S.C. Section 1350,

As Adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

I, Stephen C. Erickson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Altiris, Inc. on Form 10-Q for the quarterly period ended September 30, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Altiris, Inc.

 

Date: November 9, 2004  

/s/ STEPHEN C. ERICKSON


    Stephen C. Erickson
   

Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

A signed original of each of the written statements above required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Altiris, Inc. and will be retained by Altiris, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.