**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**
| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------|

 

**For the Quarterly Period EndedJune 30, 2003.**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Forthe transition period from                   to                   .**

 

**CommissionFile Number 0-15935**

 

**ALTRISSOFTWARE, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **CALIFORNIA**                                                   |   | **95-3634089**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **10052  MESA RIDGE COURT, SAN DIEGO, CA 92121**                 |
| (Address of  principal executive offices and zip code)           |
|                                                             |   |                                  |
| **(858)  625-3000**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES ý      NO o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

YES o      NO ý

 

Number of sharesof Common Stock outstanding at August 12, 2003:  30,890,278

 

Number ofSequentially Numbered Pages: 25

 

 

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**ALTRISSOFTWARE, INC.**

 

**INDEX**

 
| PART I.                                                                                                         | FINANCIAL INFORMATION                                     |
|-----------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|
|                                                                                                            |                                                      |
| Item 1.  Financial Statements and  Supplementary Data                                                 |
|                                                                                                            |                                                      |
|                                                                                                            | Consolidated Balance  Sheets                              |
|                                                                                                            |                                                      |
|                                                                                                            | Consolidated  Statements of Operations                    |
|                                                                                                            |                                                      |
|                                                                                                            | Consolidated  Statements of Cash Flows                    |
|                                                                                                            |                                                      |
|                                                                                                            | Condensed  Notes to the Consolidated Financial Statements |
|                                                                                                            |                                                      |
| Item  2.  Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|                                                                                                            |                                                      |
| Item  3.  Quantitative and Qualitative Disclosures About Market Risk                                  |
|                                                                                                            |                                                      |
| Item  4.  Controls and Procedures                                                                     |
|                                                                                                            |                                                      |
| PART II.                                                                                                        | OTHER INFORMATION                                         |
|                                                                                                            |                                                      |
| Item  1.  Legal Proceedings                                                                           |
|                                                                                                            |                                                      |
| Item  4.  Submission of Matters to a Vote of Security Holders                                         |
|                                                                                                            |                                                      |
| Item  6.  Exhibits and Reports on Form 8-K                                                            |

 

2

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**PART I****.  FINANCIALINFORMATION**

 

**ITEM 1****.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**ALTRIS SOFTWARE, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                         |   | **June 30,  2003** |       | **September 30,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------------|------------|
|                                                                                                                         |   | **(Unaudited)**         |       |                         |       |
| **ASSETS**                                                                                                                   |   |                    | ** ** |                         | ** ** |
| Current assets:                                                                                                              |   |                    |       |                         |       |
| Cash and cash equivalents                                                                                                    |   | $                       | 534,000    |                         | $          | 87,000 |   |
| Receivables, net                                                                                                             |   | 517,000                 |       | 1,459,000                    |       |
| Other current assets                                                                                                         |   | 140,000                 |       | 244,000                      |       |
| Total current assets                                                                                                         |   | 1,191,000               |       | 1,790,000                    |       |
|                                                                                                                         |   |                    |       |                         |       |
| Property and equipment, net                                                                                                  |   | 230,000                 |       | 215,000                      |       |
| Computer software, net                                                                                                       |   | 145,000                 |       | 420,000                      |       |
| Other assets                                                                                                                 |   | 30,000                  |       | 83,000                       |       |
| Total assets                                                                                                                 |   | $                       | 1,596,000  |                         | $          | 2,508,000 |   |
|                                                                                                                         |   |                    |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                               |   |                    | ** ** |                         | ** ** |
|                                                                                                                         |   |                    |       |                         |       |
| Current liabilities:                                                                                                         |   |                    |       |                         |       |
| Accounts payable                                                                                                             |   | $                       | 514,000    |                         | $          | 802,000 |   |
| Payable to shareholder - Spescom                                                                                             |   | 470,000                 |       | 495,000                      |       |
| Accrued liabilities                                                                                                          |   | 1,017,000               |       | 1,288,000                    |       |
| Current portion of capital lease obligation                                                                                  |   | 21,000                  |       | 6,000                        |       |
| Deferred revenue                                                                                                             |   | 2,355,000               |       | 2,171,000                    |       |
| Total current liabilities                                                                                                    |   | 4,377,000               |       | 4,762,000                    |       |
|                                                                                                                         |   |                    |       |                         |       |
| Notes payable and accrued interest to shareholder  – Spescom                                                            |   | 5,220,000               |       | 4,881,000                    |       |
| Capital lease obligation                                                                                                     |   | 68,000                  |       | 10,000                       |       |
| Total liabilities                                                                                                            |   | 9,665,000               |       | 9,653,000                    |       |
|                                                                                                                         |   |                    |       |                         |       |
| Shareholders’ deficit:                                                                                                  |   |                    |       |                         |       |
| Common stock, no par value, 40,000,000 shares  authorized; 30,890,278 and 30,841,590 issued and outstanding in 2003 and 2002 |   | 74,470,000              |       | 74,465,000                   |       |
| Common stock warrants                                                                                                        |   | 133,000                 |       | 133,000                      |       |
| Accumulated other comprehensive loss                                                                                         |   | (255,000                | )          | (156,000                     | )          |
| Accumulated deficit                                                                                                          |   | (82,417,000             | )          | (81,587,000                  | )          |
| Total shareholders’ deficit                                                                                             |   | (8,069,000              | )          | (7,145,000                   | )          |
|                                                                                                                         |   |                    |       |                         |       |
| Total liabilities and shareholders’ deficit                                                                             |   | $                       | 1,596,000  |                         | $          | 2,508,000 |   |

 

The accompanying condensed notes are an integral part of theseconsolidated financial statements.

 

3

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**ALTRISSOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                  |   | **For the  three months  ended June 30,** |     | **For the  nine months  ended June 30,** |   |
|-----------------------------------------------------------------------|--------|------------------------------------------------|----------|-----------------------------------------------|--------|
|                                                                  |   | **2003**                                       |     | **2002**                                      |   | **2003** |   | **2002** |   |
| Revenues:                                                             |   |                                           |     |                                          |   |   |   |   |   |
| Licenses                                                              |   | $                                              | 485,000  |                                          | $      | 601,000 |   | $ | 1,773,000 |   | $ | 1,248,000 |   |
| Services and other                                                    |   | 1,417,000                                      |     | 1,230,000                                     |   | 4,233,000 |   | 3,868,000 |   |
| Total revenues                                                        |   | 1,902,000                                      |     | 1,831,000                                     |   | 6,006,000 |   | 5,116,000 |   |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Cost of revenues:                                                     |   |                                           |     |                                          |   |   |   |   |   |
| Licenses                                                              |   | 189,000                                        |     | 290,000                                       |   | 589,000 |   | 899,000 |   |
| Services and other                                                    |   | 655,000                                        |     | 664,000                                       |   | 1,749,000 |   | 2,526,000 |   |
| Total cost of revenues                                                |   | 844,000                                        |     | 954,000                                       |   | 2,338,000 |   | 3,425,000 |   |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Gross profit                                                          |   | 1,058,000                                      |     | 877,000                                       |   | 3,668,000 |   | 1,691,000 |   |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Operating expenses:                                                   |   |                                           |     |                                          |   |   |   |   |   |
| Research and development                                              |   | 364,000                                        |     | 342,000                                       |   | 1,101,000 |   | 1,535,000 |   |
| Marketing and sales                                                   |   | 635,000                                        |     | 573,000                                       |   | 1,918,000 |   | 2,911,000 |   |
| General and administrative                                            |   | 319,000                                        |     | 411,000                                       |   | 1,090,000 |   | 1,523,000 |   |
|                                                                  |   | 1,318,000                                      |     | 1,326,000                                     |   | 4,109,000 |   | 5,969,000 |   |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Loss from operations                                                  |   | (260,000                                       | )        | (449,000                                      | )      | (441,000 | ) | (4,278,000 | ) |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Interest and other income                                             |   | 4,000                                          |     | 1,000                                         |   | 4,000 |   | 6,000 |   |
| Interest and other expense                                            |   | (134,000                                       | )        | (106,000                                      | )      | (393,000 | ) | (246,000 | ) |
| Net loss                                                              |   | $                                              | (390,000 | )                                             | $      | (554,000 | ) | $ | (830,000 | ) | $ | (4,518,000 | ) |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Basic and diluted net loss per common share                           |   | $                                              | (0.01    | )                                             | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.15 | ) |
|                                                                  |   |                                           |     |                                          |   |   |   |   |   |
| Shares used in computing basic and diluted net  loss per common share |   | 30,890,000                                     |     | 30,842,000                                    |   | 30,850,000 |   | 30,842,000 |   |

 

The accompanying condensed notes are an integral part of theseconsolidated financial statements.

 

4

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**ALTRISSOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                       |   | **For the  nine months  ended June 30,** |     |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------|----------|
|                                                                                       |   | **2003**                                      |     | **2002** | ** ** |
| Cash flows from operating activities:                                                      |   |                                          |     |   |   |
| Net loss                                                                                   |   | $                                             | (830,000 | ) | $ | (4,518,000 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |   |                                          |     |   |   |
| Depreciation and amortization                                                              |   | 381,000                                       |     | 804,000 |   |
| Unpaid interest to Spescom                                                                 |   | 277,000                                       |     | 254,000 |   |
| Stock options issued to consultant                                                         |   | —                                        |     | 42,000 |   |
|                                                                                       |   |                                          |     |   |   |
| Changes in assets and liabilities, net:                                                    |   |                                          |     |   |   |
| Receivables, net                                                                           |   | 1,018,000                                     |     | 287,000 |   |
| Other assets                                                                               |   | 518,000                                       |     | 219,000 |   |
| Accounts payable                                                                           |   | (301,000                                      | )        | 280,000 |   |
| Accrued liabilities                                                                        |   | (693,000                                      | )        | (472,000 | ) |
| Deferred revenue                                                                           |   | 112,000                                       |     | 163,000 |   |
| Net cash provided by (used in) operating  activities                                       |   | 482,000                                       |     | (2,941,000 | ) |
|                                                                                       |   |                                          |     |   |   |
| Cash flows from investing activities:                                                      |   |                                          |     |   |   |
| Purchases of property and equipment                                                        |   | (28,000                                       | )        | (3,000 | ) |
| Purchases of software                                                                      |   | (6,000                                        | )        | (56,000 | ) |
| Net cash used in investing activities                                                      |   | (34,000                                       | )        | (59,000 | ) |
|                                                                                       |   |                                          |     |   |   |
| Cash flows from financing activities:                                                      |   |                                          |     |   |   |
| Proceeds from shareholder loan                                                             |   | —                                        |     | 3,220,000 |   |
| Proceeds from exercise of stock options                                                    |   | 5,000                                         |     | — |   |
| Net cash provided by financing activities                                                  |   | 5,000                                         |     | 3,220,000 |   |
|                                                                                       |   |                                          |     |   |   |
| Effect of exchange rate changes on cash                                                    |   | (6,000                                        | )        | — |   |
|                                                                                       |   |                                          |     |   |   |
| Net increase in cash and cash equivalents                                                  |   | 447,000                                       |     | 220,000 |   |
|                                                                                       |   |                                          |     |   |   |
| Cash and cash equivalents at beginning of period                                           |   | 87,000                                        |     | 144,000 |   |
|                                                                                       |   |                                          |     |   |   |
| Cash and cash equivalents at end of period                                                 |   | $                                             | 534,000  |   | $ | 364,000 |   |
|                                                                                       |   |                                          |     |   |   |
| Supplementary cash flow information:                                                       |   | $                                             | 1,000    |   | $ | 4,000 |   |
| Cash paid for interest                                                                     |   |                                          |     |   |   |
|                                                                                       |   |                                          |     |   |   |
| Non-cash operating and investing activity                                                  |   |                                          |     |   |   |
| Equipment acquired under capital lease                                                     |   | $                                             | 84,000   |   | $ | 20,000 |   |

 

The accompanying condensed notes are an integral part of theseconsolidated financial statements.

 

5

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**ALTRIS SOFTWARE, INC.**

*CONDENSEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS*

**(Unaudited)**

 

***Note 1 - Basis ofPresentation***

 

The consolidatedfinancial statements include the accounts of Altris Software, Inc. and itswholly-owned subsidiaries (collectively, the “Company”). All significantintercompany balances and transactions have been eliminated. In the firstquarter of fiscal 2001, the Company acquired certain assets and liabilities ofSpescom Ltd. U.K. (formerly Altris Software Limited). Spescom Ltd.U.K. is a wholly-owned subsidiary of Spescom Ltd. (“Spescom”), which became themajority shareholder in the Company in April 2000 (See Note 2).

 

The accompanyingconsolidated financial statements as of June 30, 2003 and for the threeand nine months ended June 30, 2003 and 2002 are unaudited. Theconsolidated financial statements and related notes have been prepared inaccordance with generally accepted accounting principles applicable to interimperiods.  In the opinion of management,the consolidated financial statements reflect all adjustments, consisting onlyof normal recurring adjustments, necessary for a fair presentation of theconsolidated financial position, results of operation and cash flows for theperiods presented.

 

The information contained in the following CondensedNotes to the Consolidated Financial Statements is condensed from that whichwould appear in the annual consolidated financial statements; accordingly, theconsolidated financial statements included herein should be reviewed inconjunction with the consolidated financial statements and related notesthereto contained in the Company’s Annual Report on Form 10-K for the yearended September 30, 2002.  Itshould be understood that the accounting measurements at an interim dateinherently involve greater reliance on estimates than at year-end.  The results of operations for the interimperiods presented are not necessarily indicative of the results expected forthe entire year.

 

*Company Operations*

 

In March 2002, the Company implemented a plan tofocus on core activities and substantially reduce costs in an effort to achievea break-even level of cash flow in fiscal 2003.  Although the reductions in March 2002 reduced the Company’sresearch and development, marketing and sales capabilities, management believesthat the reduced levels of research and development, marketing and sales costsare consistent with the level of revenues currently being achieved. Moreover,the Company believes such reductions were implemented with a view to maximizingthe Company’s ability to continue to maintain and support its eB product suite,while at the same time pursue opportunities for sales of new eB core systems tonew customers.  The Company’s futureliquidity depends on its ability to generate new system sales of its eB productsuite in the near term, which cannot be assured. Failure to generate sufficientsystem sales to meet the Company’s cash flow needs can be expected to have amaterial adverse effect on the Company’s business, results of operations, andfinancial condition.  The Company’sfinancial position can be a factor in attracting new customers.  In an effort to strengthen the Company’sfinancial condition and provide capital for expanding marketing and salescapabilities, the Company is seeking additional equity or debt financing fromthird parties.  There can be noassurance that additional financing will be available or that the terms of suchfinancing will be acceptable to the Company. The Company believes that its current cash and receivables, as well asadditional cash that may be generated from operations, will be sufficient to meetits short-term needs for working capital. However, the Company may not be ableto obtain sufficient orders to enable the Company to continue on a cash flowbreak-even level, which would be necessary to continue operations in theabsence of further financing.

 

The Company in the past has received funding fromSpescom for working capital purposes. However, Spescom is not obligated toprovide additional loans.  Spescom hasstated that it intends to continue to support the Company’s operations anddepending on the merits of any situation that may arise in the future, Spescomwill make its best efforts to provide further funding if necessary. The termson which any additional funding

 

6

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may be provided are not specified and may includeinterest rates, security arrangements or additional equity dilution that arenot acceptable to the Company or that could be materially adverse to theCompany.

 

## ***Revenue Recognition***

 

The Company enters into contractual arrangements withend-users that may include licensing of the Company’s software products,product support and maintenance services, consulting services or variouscombinations thereof, including the sale of such products or servicesseparately.  The Company recognizesrevenue in accordance with Statement of Position (“SOP”) 97-2 “Software RevenueRecognition” and SOP 98-9, “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions” and Staff AccountingBulletin (“SAB”)  No. 101.

 

Software license and third party product revenues arerecognized upon shipment of the product if no significant vendor obligationsremain and collection is probable. In cases where a significant vendorobligation exists, revenue recognition is delayed until such obligation hasbeen satisfied. For new software products where a historical record has not yetbeen demonstrated that acceptance is perfunctory, the Company defersrecognition of revenue until acceptance has occurred. Annual maintenancerevenues, which consist of ongoing support and product updates, are recognizedon a straight-line basis over the term of the contract. Payments received inadvance of performance of the related service for maintenance contracts arerecorded as deferred revenue. Revenues from training and consulting servicesare recognized when the services are performed and adequate evidence ofproviding such services is available. Contract revenues for contracts orprograms requiring specialized systems are recognized using the percentage-of-completionmethod of accounting, primarily based on contract labor hours incurred to datecompared with total estimated labor hours at completion. Provisions foranticipated contract losses are recognized in the period they become known.

 

Contracts are billed based on the terms of thecontract. There are no retentions in billed contract receivables. Unbilledcontract receivables relate to revenues earned but not billed at the end of theperiod. Billings in excess of costs incurred and related earnings are includedin deferred revenue.

 

*Foreign Currency Translation*

 

Thefinancial statements of the U.K. foreign subsidiary are prepared in its localcurrency and translated into U.S. dollars based on the current exchange rate atthe end of the period for the balance sheet and a weighted-average rate for theperiod on the statement of operations. The effect of exchange rates resulted incurrency translation gains of $255,000 and $156,000 as of June 30, 2003and September 30, 2002, respectively. Foreign currency transaction gainsand losses are included in net loss.

 

*Common Stock Options*

 

In April 1996, the Company adopted its 1996 StockIncentive Plan (the “1996 Plan”).  The1996 Plan is administered by either the Board of Directors (the “Board”) or acommittee designated by the Board to oversee the plan.  Under the 1996 Plan, the maximum number ofshares of Common Stock to be issued was 2,425,000.  As of June 30, 2003, options to purchase 2,080,750 sharesare outstanding and 135,087 options are available for grant.

 

The option vesting period under the plan is determinedby the Board or a Stock Option Committee and usually provides that 25% of theoptions granted can be exercised 90 days from the date of grant, andthereafter, those options become exercisable in additional cumulative annualinstallments of 25% commencing on the first anniversary of the date of grant.Options granted are generally due to expire upon the sooner of ten years fromdate of grant, thirty days after termination of services other than by reasonof convenience of the Company, three months after disability, or one year afterthe date of the option holder’s death. The option exercise price is generallyequal to the fair market value of the common stock on the date of grant.  Options granted to employees under the 1996Plan may be either incentive stock options or nonqualified options. Onlynonqualified options may be granted to nonemployee directors.

 

7

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The Company applies Accounting Principles BoardOpinion No. 25 and related interpretations in accounting for itsstock-based compensation plan. Effective March 31, 2003, the Company has adopted Statement ofFinancial Accounting Standards (“SFAS”) 148 “Accounting for Stock BasedCompensation Transition and Disclosure” that supercedes SFAS 123, “Accountingfor Stock Based Compensation.”  SFAS 148requires proforma disclosure of net income and net income per share as if thefair value based method of accounting for stock-based awards has been appliedto both employee and non-employee option grants.  It also requires disclosure of options status quarterly.  No compensation cost was recognized foremployee stock option grants during 2003 and 2002 based upon the intrinsicvalue method, which were fixed in nature, as the options were granted at fairmarket value. Had compensation costs for the Company’s stock-based compensationgrants been determined based on the fair value at the grant dates for awardsunder the Company’s stock-based compensation plans consistent with the fairvalue method of Financial Accounting Standards Board Statement No. 123,the Company’s net loss and net loss per share would have been adjusted to thepro forma amounts indicated below:

 
|                                           |   | **For the  three months  ended June 30,** |     | **For the nine  months  ended June 30,** |   |
|------------------------------------------------|--------|------------------------------------------------|----------|-----------------------------------------------|--------|
|                                           |   | **2003**                                       |     | **2002**                                      |   | **2003** |   | **2002** |   |
| Net  loss used in computing net loss per share |   |                                           |     |                                          |   |   |   |   |   |
| As  reported                                   |   | $                                              | (390,000 | )                                             | $      | (554,000 | ) | $ | (830,000 | ) | $ | (4,518,000 | ) |
| Pro  forma                                     |   | $                                              | (404,000 | )                                             | $      | (566,000 | ) | $ | (896,000 | ) | $ | (4,674,000 | ) |
|                                           |   |                                           |     |                                          |   |   |   |   |   |
| Basic  and diluted net loss per share          |   |                                           |     |                                          |   |   |   |   |   |
| As  reported                                   |   | $                                              | (0.01    | )                                             | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.15 | ) |
| Pro  forma                                     |   | $                                              | (0.01    | )                                             | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.15 | ) |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions used for grants:

 
|                     |   | **For the  three months  ended June 30,** |   | **For the  nine months  ended June 30,** |   |
|--------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                     |   | **2003**                                       |   | **2002**                                      |   | **2003** |   | **2002** | ** ** |
| Dividend  Yield          |   | 0                                              | %      | 0                                             | %      | 0 | % | 0 | % |
| Expected  Volatility     |   | 285                                            | %      | 318                                           | %      | 303 | % | 221 | % |
| Risk  free interest rate |   | 3.33                                           |   | 5.66                                          |   | 3.33 |   | 5.66 |   |
| Expected  lives (years)  |   | 10                                             |   | 10                                            |   | 10 |   | 10 |   |

 

***Note 2 – Spescom Transaction and Related Parties***

 

Under a royalty arrangement, Spescom resells certainof the Company’s software.  For thethree and nine month periods ended June 30, 2003, the Company recognizedroyalty revenue of $2,000 and $11,000 compared to $0 and $9,000 for the threeand nine month periods ended June 30, 2002, arising from this arrangement.  Spescom, through its wholly-ownedsubsidiary, Spescom Ltd. U.K., provides certain administrative and accountingfunctions for the Company’s United Kingdom operations.  The Company is billed a monthly fee bySpescom for reimbursement of certain costs in the United Kingdom, including costsassociated with the office facilities (including rental expense as describedbelow); all accounting and human resources services; and certain corporatemarketing activities.  For the three andnine month periods ended June 30, 2003, the administrative fees totaled$155,000 and $460,000 compared to $142,000 and $561,000 for the three and ninemonth periods ended June 30, 2002. At June 30, 2003, the Company had a payable to Spescom of $470,000as compared to $495,000, at September 30, 2002.  In the United States, for the three and nine month periods endedJune 30, 2003, the Company billed Spescom for certain marketing servicestotaling $13,000 and $40,000 compared to $13,000 and $39,000 for the three andnine months ended June 30, 2002.

 

8

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In 1999, as part of an agreement with Spescom, thelease for the United Kingdom office facility was to be assigned to Spescom;however, the landlord did not grant its consent to the assignment.  Since 1999 Spescom has paid the rent underthe lease for the entire office directly to the landlord and the Companyreimburses Spescom for the entire payment. The lease expires in March 2006 and has an annual rent of $530,000.  A portion of the office has been subleasedto a third party tenant for an annual rent of $179,000.  The sublease also expires March 2006;however, the tenant has an option to terminate the lease inFebruary 2004.  For the three andnine month periods ended June 30, 2003 the Company paid Spescom as part ofthe monthly administration fee, rent of $69,000 and $205,000 compared to$69,000 and $202,000 for the three and nine month periods ended June 30,2002.

 

Related party liabilitiesconsist of the following: 

 
|                                                               |   | **June 30,  2003** |      | **September 30,  2002** |   |
|--------------------------------------------------------------------|--------|-------------------------|-----------|------------------------------|--------|
| Long-term  Note Including Accrued Interest Payable to Shareholder: |   |                    |      |                         |   |
|                                                               |   |                    |      |                         |   |
| Notes  payable on demand—Spescom Ltd. U.K.                    |   | $                       | 1,798,000 |                         | $      | 1,669,000 |   |
| Note  payable —Spescom Ltd. U.K.                              |   | 2,132,000               |      | 1,980,000                    |   |
| Note  payable —Spescom                                        |   | 1,290,000               |      | 1,232,000                    |   |
|                                                               |   |                    |      |                         |   |
|                                                               |   | $                       | 5,220,000 |                         | $      | 4,881,000 |   |

 

At June 30, 2003, the Company had three demandnotes payable to Spescom Ltd U.K. for $400,000, $500,000 and $700,000,respectively, each bearing an annual interest rate of 10%.  As of June 30, 2003, the balance owedon the demand notes was $1,798,000 including accrued interest.  Interest expense, accrued but unpaid on thenotes for the three and nine month periods ended June 30, 2003 was $44,000and $129,000 compared to $26,000 and $27,000 for the three and nine monthperiods ended June 30, 2002. Spescom has agreed that the demand notes will not be called prior toOctober 1, 2004.

 

At June 30, 2003, pursuant to a promissory note,the Company owed Spescom Ltd. U.K. $2,132,000, including accrued interest.  The note bears interest at an interest rateof 10% per annum, with principal and interest payable at maturity, onOctober 15, 2003.  Spescom extendedthe maturity date on this note to October 1, 2004.  Interest expense, accrued but unpaid on thisnote for the three and nine-month periods ended June 30, 2003 was $52,000and $153,000 compared to $47,000 and $139,000 for the three and nine monthperiods ended June 30, 2002.

 

As of June 30, 2003,the Company had a note payable to Spescom for $1,290,000, including accruedinterest.  Interest on the outstandingnote accrues at the rate of 10% per annum. Principal and all unpaid accrued interest is payable at maturity onOctober 15, 2003. Spescom extended the maturity date on this note toOctober 1, 2004.  Interest expense,accrued but unpaid on this note for the three and nine month periods endedJune 30, 2003 totaled $32,000 and $92,000 compared to $29,000 and $67,000for the three and nine-month periods ended June 30, 2002.

 

These notes payable arecollateralized by a security interest in favor of both Spescom and Spescom Ltd.U.K. in respect of all of the Company’s assets.

 

9

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***Note 3 – Receivables***

 

Receivablesconsist of the following:

 
|                                  |   | **June 30,****2003** |    | **September 30,  2002** |   |
|---------------------------------------|--------|---------------------------|---------|------------------------------|--------|
|                                  |   | **(Unaudited)**           |    |                         |   |
|                                  |   |                      |    |                         |   |
| Gross receivables                     |   | $                         | 595,000 |                         | $      | 1,615,000 |   |
| Less allowance for  doubtful accounts |   | (78,000                   | )       | (156,000                     | )      |
|                                  |   | $                         | 517,000 |                         | $      | 1,459,000 |   |

 

## ***Note 4 –Reconciliation of Net Loss and Shares Used in Per Share Computations***

 

Basicnet loss per common share is computed as net loss divided by the weightedaverage number of common shares outstanding during the period.  Diluted net income per common share iscomputed as net income divided by the weighted average number of common sharesand potential common shares, using the treasury stock method, outstandingduring the periods and assumes conversion into common stock at the beginning ofeach period of potentially dilutive securities (including convertible preferredstock, options and warrants). Computations of basic and diluted earnings (loss) per share do not giveeffect to individual potential common stock instruments for any period in whichtheir inclusion would be anti-dilutive.

 
|                                                                                                      |   | **For the  three months  ended June 30,** |     | **For the  nine months  ended June 30,** |       |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|----------|-----------------------------------------------|------------|
|                                                                                                      |   | **2003**                                       |     | **2002**                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                      |   |                                           |     |                                          |       |   |   |   |   |
| Net loss                                                                                                  |   | $                                              | (390,000 | )                                             | $          | (554,000 | ) | $ | (830,000 | ) | $ | (4,518,000 | ) |
| Weighted average common shares outstanding used in  computing basic and diluted net loss per common share |   | 30,890,000                                     |     | 30,842,000                                    |       | 30,850,000 |   | 30,842,000 |   |
|                                                                                                           |        |                                                |          |                                               |            |  |  |  |  |  |  |  |  |

 

Employee stockoptions to acquire 2,080,750 and 2,045,626 shares of common stock wereoutstanding at June 30, 2003 and 2002, respectively, and were not includedin the computation of diluted earnings per share because their effect was anti-dilutive.

 

10

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***Note 5 – Segment and Geographic Information***

 

The Company hasone business segment which consists of the development and sale of a suite ofclient/server document management software products.

 

Results fromoperations for the three and nine month periods ended June 30, 2003 and2002 by customer location are as follows:

 
|                              |   | **For the three months ended  June 30,** |      | **For the nine months ended  June 30,** |   |
|-----------------------------------|--------|-----------------------------------------------|-----------|----------------------------------------------|--------|
|                              |   | **2003**                                      |      | **2002**                                     |   | **2003** |   | **2002** |   |
| Revenues:                         |   |                                          |      |                                         |   |   |   |   |   |
| United States                     |   | $                                             | 1,083,000 |                                         | $      | 793,000 |   | $ | 3,423,000 |   | $ | 2,672,000 |   |
| Europe, primarily  United Kingdom |   | 819,000                                       |      | 1,038,000                                    |   | 2,583,000 |   | 2,444,000 |   |
|                              |   | $                                             | 1,902,000 |                                         | $      | 1,831,000 |   | $ | 6,006,000 |   | $ | 5,116,000 |   |
|                              |   |                                          |      |                                         |   |   |   |   |   |
| Operating Profit  (loss):         |   |                                          |      |                                         |   |   |   |   |   |
| United States                     |   | $                                             | (490,000  | )                                            | $      | (777,000 | ) | $ | (1,134,000 | ) | $ | (3,968,000 | ) |
| Europe, primarily  United Kingdom |   | 230,000                                       |      | 328,000                                      |   | 693,000 |   | (310,000 | ) |
|                              |   | $                                             | (260,000  | )                                            | $      | (449,000 | ) | $ | (441,000 | ) | $ | (4,278,000 | ) |

 

***Note 6 - Recent Accounting Pronouncements***

 

In January 2003, theFASB issued Interpretation 46, *Consolidationof Variable Interest Entities.*In general, a variable interestentity is a corporation, partnership, trust, or any other legal structure usedfor business purposes that either (a) do not have equity investors with votingrights or (b) have equity investors that do not provide sufficient financialresources for the entity to support its activities. Interpretation 46 requiresa variable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returnsor both. The consolidation requirements of Interpretation 46 apply immediatelyto variable interest entities created after January 31, 2003. Theconsolidation requirements apply to older entities in the first fiscal year orinterim period beginning after June 15, 2003. Certain of the disclosurerequirements apply in all financial statements issued after January 31,2003, regardless of when the variable interest entity was established. We donot expect this interpretation to have a material effect on our consolidatedfinancial position or consolidated results of operations as we currently do nothave any variable interest entities falling within the scope of SFAS No. 146.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.”  SFAS No. 149amends and clarifies accounting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS 133.  In particular, SFAS No.149 clarifies under what circumstances a contract within an initial netinvestment meets the characteristic of a derivative and when a derivativecontains a financing component that warrants special reporting in the statementof cash flows.  SFAS No. 149 isgenerally effective for contracts entered into or modified after June 30,2003.  We do not expect thisinterpretation to have a material effect on our consolidated financial positionor consolidated results of operations as we currently do not have anyderivative instruments and hedging activities falling within the scope of SFASNo. 149.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer

 

11

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classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  We donot expect this interpretation to have a material effect on our consolidatedfinancial position or consolidated results of operations as we currently do nothave any financial instruments falling within the scope of SFAS No. 150.

 

***Note 7–Comprehensive Income***

 
|                                          |   | **For the  three months ended****June 30,** |     | **For the  nine months ended****June 30,** |   |
|-----------------------------------------------|--------|---------------------------------------------|----------|--------------------------------------------|--------|
|                                          |   | **2003**                                    |     | **2002**                                   |   | **2003** |   | **2002** | ** ** |
|                                          |   |                                        |     |                                       |   |   |   |   |   |
| Net loss                                      |   | $                                           | (390,000 | )                                          | $      | (554,000 | ) | $ | (830,000 | ) | $ | (4,518,000 | ) |
| Other comprehensive income (loss):            |   |                                        |     |                                       |   |   |   |   |   |
|                                          |   |                                        |     |                                       |   |   |   |   |   |
| Foreign currency translation gain adjustments |   | (81,000                                     | )        | (124,000                                   | )      | (99,000 | ) | (91,000 | ) |
| Comprehensive loss                            |   | $                                           | (471,000 | )                                          | $      | (678,000 | ) | $ | (929,000 | ) | $ | (4,609,000 | ) |

 

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

 

This report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  Theseforward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from historical results oranticipated results, including those set forth under “Certain Factors That MayAffect Future Results” below and elsewhere in, or incorporated by referenceinto, this report.

 

When used in the following discussion, the words “believes,”“anticipates” and similar expressions are intended to identify forward-lookingstatements. Such statements are subject to certain risks and uncertainties,which could cause actual results to differ materially from those projected.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. The Company undertakes noobligation to publicly release the result of any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

The following discussion should be read in conjunction with the ConsolidatedFinancial Statements and the related notes thereto that appear elsewhere inthis document.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

The consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America. As such, management is required to make judgments, estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. The significant accounting policieswhich are most critical to aid in fully understanding and evaluating reportedfinancial results include the following:

 

*Revenue Recognition*

 

The Company enters into contractual arrangements withend-users that may include licensing of the Company’s software products,product support and maintenance services, consulting services or variouscombinations thereof, including the sale of such products or servicesseparately.  The Company recognizesrevenue in accordance with Statement of Position (“SOP”) 97-2 “Software RevenueRecognition” and SOP 98-9, “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions” and Staff AccountingBulletin (“SAB”)  No. 101.

 

Software license and third party product revenues arerecognized upon shipment of the product if no significant vendor obligationsremain and collection is probable. In cases where a significant vendorobligation exists, revenue recognition is delayed until such obligation hasbeen satisfied. For new software products where a historical record has not yetbeen demonstrated that acceptance is perfunctory, the Company defersrecognition of revenue until acceptance has occurred. Annual maintenancerevenues, which consist of ongoing support and product updates, are recognizedon a straight-line basis over the term of the contract. Payments received inadvance of performance of the related service for maintenance contracts arerecorded as deferred revenue. Revenues from training and consulting servicesare recognized when the services are performed and adequate evidence ofproviding such services is available. Contract revenues for long-term contractsor programs requiring specialized systems are recognized using thepercentage-of-completion method of accounting, primarily based on contractlabor hours incurred to date compared with total estimated labor hours atcompletion. Provisions for anticipated contract losses are recognized at thetime they become known.

 

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Contracts are billedbased on the terms of the contract. There are no retentions in billed contractreceivables. Unbilled contract receivables relate to revenues earned but notbilled at the end of the period. Billings in excess of costs incurred andrelated earnings are included in deferred revenue.

 

The Company considers many factors when applyingaccounting principles generally accepted in the United States of Americarelated to revenue recognition.  Thesefactors include, but are not limited to:

 

•              The actual contractual terms, suchas payment terms, delivery dates, and pricing of the various product andservice elements of a contract

•              Availability of products to bedelivered

•              Time period over which servicesare to be performed

•              Creditworthiness of the customer

•              The complexity of customizationsto the Company’s software required by service contracts

•              The sales channel through whichthe sale is made (direct, VAR, distributor, etc.)

•              Discounts given for each elementof a contract

•              Any commitments made as toinstallation or implementation “go live” dates

 

Each of the relevant factors is analyzed to determineits impact, individually and collectively with other factors, on the revenue tobe recognized for any particular contract with a customer.  Management is required to make judgmentsregarding the significance of each factor in applying the revenue recognitionstandards, as well as whether or not each factor complies with such standards.  Any misjudgment or error by management inits evaluation of the factors and the application of the standards, especiallywith respect to complex or new types of transactions, could have a materialadverse effect on the Company’s current and future operating results.

 

*Allowance for Doubtful Accounts*

 

The Company sells its products directly toend-users, generally requiring a significant up-front payment and remainingterms appropriate for the creditworthiness of the customer. The Company alsosells its products to VARs and other software distributors generally underterms appropriate for the creditworthiness of the VAR or distributor.Management believes that no significant concentrations of credit risk existedat June 30, 2003 and September 30, 2002. The Company continuously monitors its customer account balances andactively pursues collections on past due balances. The Company maintains anallowance for doubtful accounts which is comprised of a general reserve basedon historical collections performance plus a specific reserve for certain knowncustomers with collections issues. If actual bad debts are greater than thereserves calculated based on historical trends and known customer issues, theCompany records additional bad debt expense which could have a material adverseeffect on our business, results of operations and financial condition for theperiods in which such additional expense occurs.

 

## ***Capitalized Software DevelopmentCosts***

 

Software development costs incurred subsequent to thedetermination of technological feasibility and marketability of a softwareproduct are capitalized. Amortization of capitalized software development costscommences when the products are available for general release. Amortization isdetermined on a product by product basis using the greater of a ratio ofcurrent product revenues to projected current and future product revenues or anamount calculated using the straight-line method over the estimated economiclife of the product, which is generally three to five years. In addition toin-house software development costs, the Company purchases certain softwarefrom third-party software providers and capitalizes such costs in softwaredevelopment costs. The Company continually evaluates the recoverability basedon the present value of future cash flows of its capitalized softwaredevelopment costs and considers any events or changes in circumstances thatwould indicate that the carrying amount of an asset may not be recoverable. Anymaterial changes in circumstances, such as a large decrease in revenues or thediscontinuation of a particular product line could

 

14

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require future write-downs in the Company’s capitalized softwaredevelopment costs and could have a material adverse impact on our operatingresults for the periods in which such write-downs occur.

 

**RESULTS OF OPERATIONS**

 

***Comparison ofResults for the Three Months Ended June 30, 2003 to the Three Months Ended June30, 2002***

* *

*Revenues*

 

Revenues increased $71,000 (4%) from $1,831,000 forthe three months ended June 30, 2002 to $1,902,000 for the three months endedJune 30, 2003.

 

For the three months ended June 30, 2003 revenuesconsisted of $485,000 (25%) in software licenses and $1,417,000 (75%) relatedto services and other revenue. This compares to software license revenues of$601,000 (33%) and services and other revenue of $1,230,000 (67%) for the threemonths ended June 30, 2002.

 

Software license revenues decreased $116,000 for thethree month period ended June 30, 2003 over the three months ended June 30,2002.  The decrease was due to highersoftware sales in the prior year of approximately $250,000 from existingcustomers that purchased upgrades and expanded number of licenses.  The purchase of upgrades and expansion ofnumber of licenses can vary quarter to quarter causing fluctuations on quartercomparisons.

 

Revenues generated from services increased $187,000for the three month period ended June 30, 2003 over the three month periodended June 30, 2002.  The increase isdue to sales to several new customers which require additional services thattypically include a design study, integration with other business systems, andtraining.

 

*Cost ofRevenues*

 

Gross profit consists of gross profit from licensesand gross profit from services and other revenues. Gross profit as a percentageof revenue was 56% for the three month period ended June 30, 2003 compared to agross profit percentage of 48% for the three month period ended June 30, 2002.

 

Cost of license revenues consists of costs associatedwith reselling third-party software products and amortization of internalsoftware development costs. The total overall costs of license revenuesdecreased $101,000 due to a decrease in amortization of $145,000 as a result ofthe write-down in 2002 of capitalized costs associated with certain oldersoftware products. The decrease was offset by an increase of $44,000 in thirdparty software costs.  The overalldecrease in costs resulted in an improvement in gross profit percentage oflicense revenues to 61% for the three month period ended June 30, 2003 ascompared to 52% for the same period ended June 30, 2002.

 

Cost of services andother revenues consists primarily of personnel-related costs in providingconsulting services, training to customers and support. It also includes costsassociated with reselling third-party hardware and maintenance.  The total overall costs of services andother revenues decreased $9,000.  Thedecrease was due to a reduction in labor costs and associated overhead of$61,000 which was offset by an increase of $54,000 in third party service costsassociated with a customer contract for conversion of data.  Gross profit from services and other revenueas a percentage of services and other revenue improved to 54% for the threemonth period ended June 30, 2003 compared to 46% for the three month periodended June 30, 2002.

 

The Company’s software and services are sold at asignificantly higher margin than third party products which are resold at alower gross profit percentage in order for the Company to remain competitive inthe marketplace for such third party products. Gross profit percentages can fluctuate quarterly based on the revenuemix of Company software, services and third party software or hardware.

 

15

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*OperatingExpenses*

 

Research and developmentexpense for the three month period ended June 30, 2003 was $364,000 as comparedto $342,000 for the three month period ended June 30, 2002. The increase inresearch and development for the three month period ended June 30, 2003 wasprimarily due to an increase in research and development labor and associatedcosts related to launching two new releases of the eB product.

 

Marketing and salesexpense for the three month period ended June 30, 2003 was $635,000 as comparedto $573,000 for the three month period ended June 30, 2002. The increase wasdue to primarily to an increase in labor costs relating to marketing and salesof the eB product.  The primary increasein marketing labor was due an effort to promote the new eB Maps product andparticipation in several trade shows promoting the eB product suite.

 

General andadministrative expense was $319,000 for the three month period ended June 30,2003 as compared to $411,000 for the three month period ended June 30, 2002.The decrease is primarily due to a reduction in the Company’s allowance for baddebt.  The reduction was based on theCompany’s historical experience of high collectibility of accounts receivableand the decrease in accounts receivable balance at June 30, 2003.

 

Interest and other expense was $134,000 for the threemonth period ended June 30, 2003 as compared to $106,000 for the three monthperiod ended June 30, 2002.  Theincrease was due to additional interest expense on the Company’s higher debtbalances during 2003 as compared to 2002.

 

***Comparison ofResults for the Nine Months Ended June 30, 2003 to the Nine Months Ended June30, 2002***

* *

*Revenues*

 

Revenues increased $890,000 (17%) from $5,116,000 forthe nine month period ended June 30, 2002 to $6,006,000 for the nine monthperiod ended June 30, 2003.

 

For the nine months ended June 30, 2003 revenuesconsisted of $1,773,000 (30%) in software licenses and $4,233,000 (70%) relatedto services and other revenue. This compares to software license revenues of$1,248,000 (24%) and services and other revenue of $3,868,000 (76%) for thesix-month period ended June 30, 2002.

 

Software license revenues increased $525,000 for thenine month period ended June 30, 2003 compared to the nine month period endedJune 30, 2002. The increase is due to higher sales of the eB product as aresult of customers expanding their existing software systems and softwareorders from new customers.  Prior yearssales were lower as a result of the recent economic slowdown in the UnitedStates of America.

 

Revenues generated from services increased $365,000for the nine month period ended June 30, 2003 over the nine month period endedJune 30, 2002. The increase is due to sales to several new customers whichrequire more services that typically include a design study, integration withother business systems and training.

 

A small number of customers have typically accountedfor a large percentage of the Company’s annual revenue. One customer accountedfor 21% of total revenue for the nine months ended June 30, 2003 as compared toone customer that accounted for 18% of total revenue for the nine-month periodended June 30, 2002.  One consequence ofthis concentration in customers has been that revenue can fluctuatesignificantly on a quarterly basis.  TheCompany’s reliance on relatively few customers could have a material adverseeffect on the results of its operations on a quarterly basis.

 

16

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*Cost ofRevenues*

 

Gross profit consists of gross profit from licensesand gross profit from services and other. Gross profit as a percentage ofrevenue was 61% for the nine-month period ended June 30, 2003 compared to agross profit percentage of 33% for the nine-month period ended June 30, 2002.The increase in gross profit percentage was due to the increase in softwarelicense revenue, which has a higher gross profit margin and a reduction in thecost of sales in both license and service sales and software impairmentwrite-downs of $865,000 recorded in the fourth quarter of fiscal 2002.

 

Cost of license revenues consists of costs associatedwith reselling third-party software products and amortization of internalsoftware development costs. The total overall costs of license revenuesdecreased $310,000 due to a decrease in amortization of $370,000 as a result ofthe write-down in 2002 of capitalized costs associated with certain oldersoftware products.  The decrease waspartially offset by an increase in third-party software costs during theCompany’s first and third quarter of fiscal 2003. The overall decrease in costof license revenues resulted in an improvement in gross profit percentage oflicense revenues to 67% for the nine month period ended June 30, 2003 ascompared to 28% for the same period ended June 30, 2002.

 

Cost of services andother revenues consists primarily of personnel-related costs in providingconsulting services, training to customers and support. It also includes costsassociated with reselling third-party hardware and maintenance.  The total overall costs of services andother revenues decreased $777,000. Gross profit from services and other revenue as a percentage of servicesand other revenue improved to 59% for the nine month period ended June 30, 2003compared to 35% for the nine month period ended June 30, 2002. The decrease incost of services and other revenues and the improvement in the gross profitpercentage from services and other revenues was due to the savings effect ofpersonnel reductions in March 2002 totaling $486,000 and other costs of$282,000 relating primarily to other third party costs, including maintenance,consultants and travel.

 

*OperatingExpenses*

 

Research and developmentexpense for the nine-month period ended June 30, 2003 was $1,101,000 ascompared to $1,535,000 for the nine-month period ended June 30, 2002. Thedecreases in research and development expenses for the nine-month period endedJune 30, 2003 was primarily due to the reduction of personnel and associatedcosts of $456,000 as a result of personnel reductions in March 2002.  The reductions were implemented with a viewto retaining the Company’s core technological competencies and maintaining itsabilities to continue to enhance its eB product suite.

 

Marketing and salesexpense for the nine-month period ended June 30, 2003 was $1,918,000 ascompared to $2,911,000 for the nine-month period ended June 30, 2002. Thedecrease was primarily due to the reduction of marketing and sales personnel andassociated costs of $751,000 as a result of personnel reductions in March 2002and other reductions in costs of $304,000 relating primarily to travel andconsultants.  Management believes thatthe reduced sales and marketing expenditures are more in line with currentrevenues.

 

General andadministrative expense was $1,090,000 for the nine-month period ended June 30,2003 as compared to $1,523,000 for the nine-month period ended June 30, 2002.The decrease was primarily due to the reduction in general and administrativepersonnel and their associated costs of $272,000 as a result of personnelreductions in March 2002 and a decrease in occupancy costs and allowance forbad debt of $103,000.

 

Interest and other expense was $393,000 for thenine-month period ended June 30, 2003 as compared to $246,000 for thenine-month period ended June 30, 2002. The increase was due to additional interest expense on the Company’shigher debt balances during 2003 as compared to 2002.

 

17

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**LIQUIDITY AND CAPITAL RESOURCES**

 

At June 30, 2003, the Company’s cash and cashequivalents totaled $534,000 as compared to $87,000 at September 30, 2002, andits current ratio (current assets divided by current liabilities) was .27 to 1at June 30, 2003.

 

For the nine months ended June 30, 2003, cash providedby operating activities totaled $482,000, as compared to cash used by operatingactivities of $3,175,000 for the same period in 2002. The reversal was due inpart to increased sales and collections in fiscal year 2003 combined with thecost reductions implemented in March 2002.

 

TheCompany has received loans from Spescom and affiliates in the past to meet itsobligations. Accrued interest for the nine months ended June 30, 2003 increasedthe outstanding balance of these loans from Spescom from $4,881,000 atSeptember 30, 2002 to $5,220,000 at June 30, 2003. Such loans are secured byall of the assets of the Company. See “Related Party Transactions” below.

 

Although the Company inthe past has received funding from Spescom for working capital purposes,Spescom is not obligated to provide additional loans.  Spescom has stated that it intends to continue to support theCompany’s operations and depending on the merits of any situation that may arisein the future, Spescom will make its best efforts to provide further funding ifnecessary. However, if Spescom is otherwise able to provide additional loans onterms acceptable to the Company, the funding of such loans may be delayed orprevented by currency exchange regulations of the Republic of South Africa,under which Spescom is required to apply for and obtain the approval of theSouth African Reserve Bank before providing any funds to the Company. Moreover,the terms on which any additional funding may be provided are not specified andmay include interest rates, security arrangements or additional equity dilutionthat are not acceptable to the Company or that could be materially adverse tothe Company.

 

In March 2002, theCompany implemented a plan to focus on core activities and to substantiallyreduce costs in an effort to achieve a break-even level of cash flow in fiscal2003.  For the three month period endedJune 30, 2003 the Company had a ($114,000) loss of Earnings Before Interest,Taxes, Depreciation and Amortization (EBITDA) compared to a loss of $(192,000)for the same period in fiscal 2002 (see table below).  The improvement in EBITDA was due to the cost reductionsimplemented in March 2002 and increased sales from the prior year.  For the nine months ended June 30, 2003, theCompany had a ($60,000) loss of EBITDA compared to a loss of ($3,474,000) forthe same period in fiscal 2002 (see table below).  Management believes that the cost reductions implemented in March2002 have proven effective and will continue in a effort to enable the Companyto achieve a cash flow break-even from on-going operations based on theprojected level of revenues.  

 
|                                  |   | **For the  three months  ended June 30,** |     | **For the  nine months  ended June 30,** |   |
|---------------------------------------|--------|-------------------------------------------|----------|------------------------------------------|--------|
| **Calculation of EBITDA (Unaudited)** |   | **2003**                                  |     | **2002**                                 |   | **2003** |   | **2002** |   |
|                                  |   |                                      |     |                                     |   |   |   |   |   |
| Net Loss                              |   | $                                         | (390,000 | )                                        | $      | (554,000 | ) | $ | (830,000 | ) | $ | (4,518,000 | ) |
| Add back the  following:              |   |                                      |     |                                     |   |   |   |   |   |
| Interest and  other, net              |   | 130,000                                   |     | 105,000                                  |   | 389,000 |   | 240,000 |   |
| Depreciation and  amortization        |   | 146,000                                   |     | 257,000                                  |   | 381,000 |   | 804,000 |   |
|                                  |   |                                      |     |                                     |   |   |   |   |   |
| EBITDA                                |   | $                                         | (114,000 | )                                        | $      | (192,000 | ) | $ | (60,000 | ) | $ | (3,474,000 | ) |
|                                  |   |                                      |     |                                     |   |   |   |   |   |
| EBITDA per  common share              |   | $                                         | (0.00    | )                                        | $      | (0.01 | ) | $ | 0.00 |   | $ | (0.11 | ) |
|                                  |   |                                      |     |                                     |   |   |   |   |   |
| Shares used in  computing EBITDA      |   | 30,861,000                                |     | 30,842,000                               |   | 30,850,000 |   | 30,842,000 |   |

 

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Although the personnelreductions in March 2002 reduced the Company’s research and development,marketing and sales capabilities, management believes that the reduced levelsof research and development, marketing and sales costs are consistent with thelevel of revenues currently being achieved. Moreover, the Company believes suchreductions were implemented with a view to maximizing the Company’s ability to continueto maintain and support its eB product suite, while at the same time pursuingopportunities for sales of new eB core systems to new customers. The Company’sfuture liquidity depends on its ability to generate new system sales of its eBproduct suite in the near term, which cannot be assured. Failure to generatesufficient system sales to meet the Company’s cash flow needs can be expectedto have a material adverse effect on the Company’s business, results ofoperations, and financial condition.  TheCompany’s financial position can be a factor in attracting new customers.  In an effort to strengthen the Company’sfinancial condition and provide capital for expanding marketing and salescapabilities, the Company is seeking additional equity or debt financing fromthird parties.  There can be noassurance that additional financing will be available or that the terms of suchfinancing will be acceptable to the Company. The Company believes that its current cash and receivables, as well asadditional cash that may be generated from operations, will be sufficient tomeet its short-term needs for working capital. However, the Company maynot be able to obtain sufficient orders to enable the Company to continue on acash flow break-even level, which would be necessary to continue operations inthe absence of further financing.

 

**Net Operating Loss Tax Carryforwards**

 

The Company has recordeda valuation allowance amounting to the entire net deferred tax asset balancedue to its lack of a history of earnings, possible limitations on the use ofnet operating loss (NOL) carryforwards, and the expiration of certain of thenet operating loss carryforwards which gives rise to uncertainty as to whetherthe net deferred tax asset is realizable.

 

The Company has net operatingloss carryforwards of $32,961,000 and $7,271,000 for federal and state taxpurposes, respectively, which expire over the years 2003 through 2021.   Effective September 11, 2002, pursuant toCalifornia revenue and tax code section 24416.3, no net operating lossdeduction would be allowed for any taxable year beginning on or after January1, 2002, and before January 1, 2004. For any suspended losses, the carryover period would be extended by oneyear for losses incurred in tax year beginning on or after January 1, 2002, andbefore January 1, 2003; and by two years for losses incurred in taxable yearsbeginning before January 1, 2002.  TheCompany has investment and research activity credit carryforwards aggregating$640,000, which will substantially expire in the years 2003 through 2006.

 

As a result of the Spescom acquisition, an additionalownership change occurred in April 2000. The Company’s ability to utilizethe consolidated NOL in future years will be limited pursuant to InternalRevenue Code Section 382. The annual limitation is approximately $1,159,000.

 

**CERTAIN FACTORS THAT MAY AFFECTFUTURE RESULTS**

 

*ForeignCurrency*

 

The Company’s geographic markets are primarily in the United States andEurope, with sales in other parts of the world.  In the nine months ended June 30, 2003, revenue from the UnitedStates, Europe and other locations in the world were 56%, 43% and 1%,respectively.  This compares to 48%, 48%and 4%, respectively for the same period in 2002.  The European currencies have been relatively stable against theU.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a significantimpact on the Company’s revenues or results of operations.  Changes in foreign currency rates, thecondition of local economies, and the general volatility of software marketsmay result in higher or lower proportion of foreign revenues in thefuture.  Although the Company’soperating and pricing strategies take into account changes in 

 

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exchange rates over time, there can be no assurance that futurefluctuations in the value of foreign currencies will not have a materialadverse effect on the Company’s business, operating results and financialcondition.

 

*Inflation*

 

The Company believes that inflation has not had amaterial effect on its operations to date. Although the Company enters into fixed-price contracts, management doesnot believe that inflation will have a material impact on its operations forthe foreseeable future, as the Company takes into account expected inflation inits contract proposals and is generally able to project its costs based onforecasted contract requirements.

 

**RELATED PARTY TRANSACTIONS**

 

Under a royaltyarrangement, Spescom resells certain of the Company’s software.  For the three and nine month periods endedJune 30, 2003, the Company recognized royalty revenue of $2,000 and $11,000compared to $0 and $9,000 for the three and nine month periods ended June 30,2002, arising from this arrangement. Spescom, through its wholly-owned subsidiary, Spescom Ltd. U.K.,provides certain administrative and accounting functions for the Company’sUnited Kingdom operations.  The Companyis billed a monthly fee by Spescom for reimbursement of certain costs in theUnited Kingdom, including the office facilities (including rental expense asdescribed below); all accounting and human resources services; and certaincorporate marketing activities.  For thethree and nine month periods ended June 30, 2003, the administrative feestotaled $155,000 and $460,000 compared to $142,000 and $561,000 for the threeand nine month periods ended June 30, 2002. At June 30, 2003, the Company had a payable to Spescom of $470,000 ascompared to $495,000, at September 30, 2002.  In the United States, for the three and nine month periods endedJune 30, 2003, the Company billed Spescom for certain marketing servicestotaling $13,000 and $40,000 compared to $13,000 and $39,000 for the three andnine months ended June 30, 2002.

 

In 1999, as part of anagreement with Spescom, the lease for the United Kingdom office facility was tobe assigned to Spescom; however, the landlord did not grant its consent to theassignment.  Since 1999 Spescom has paidthe rent under the lease for the entire office directly to the landlord and theCompany reimburses Spescom for the entire payment.  The lease expires in March 2006 and has an annual rent of$530,000.  A portion of the office hasbeen subleased to a third party tenant for an annual rent of $179,000.  The sublease also expires March 2006;however, the tenant has an option to terminate the lease in February 2004.  For the three and nine month periods endedJune 30, 2003 the Company paid Spescom as part of the monthly administrationfee, rent of $69,000 and $205,000 compared to $69,000 and $202,000 for thethree and nine month periods ended June 30, 2002.

 

Related party liabilities consist of the following: 

 
|                                                               |   | **June 30,  2003** |      | **September 30,  2002** |   |
|--------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| Long-term Note  Including Accrued Interest Payable to Shareholder: |   |               |      |                    |   |
|                                                               |   |               |      |                    |   |
| Notes payable on  demand-Spescom Ltd. U.K.                         |   | $                  | 1,798,000 |                    | $      | 1,669,000 |   |
| Note payable  —Spescom Ltd. U.K.                              |   | 2,132,000          |      | 1,980,000               |   |
| Note payable  —Spescom                                        |   | 1,290,000          |      | 1,232,000               |   |
|                                                               |   |               |      |                    |   |
|                                                               |   | $                  | 5,220,000 |                    | $      | 4,881,000 |   |

 

At June 30, 2003,the Company had three demand notes payable to Spescom Ltd U.K. for $400,000,$500,000 and $700,000, respectively, each bearing an annual interest rate of10%.  As of June 30, 2003, the balanceowed on the demand notes was $1,798,000 including accrued interest.  Interest expense, accrued but unpaid on thenotes for the three and nine month periods ended June 30, 2003 was $44,000 and$129,000 compared to $26,000 and $27,000 for the three and nine month periodsended June 30, 2002.  Spescom has agreedthat the demand notes will not be called prior to October 1, 2004.

 

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At June 30, 2003,pursuant to a promissory note, the Company owed Spescom Ltd. U.K. $2,132,000,including accrued interest.  The note bearsinterest at an interest rate of 10% per annum, with principal and interestpayable at maturity, on October 15, 2003. Spescom extended the maturity date on this note to October 1, 2004.  Interest expense, accrued but unpaid on thisnote for the three and nine-month periods ended June 30, 2003 was $52,000 and$153,000 compared to $47,000 and $139,000 for the three and nine month periodsended June 30, 2002.

 

As of June 30, 2003, the Company had a note payable toSpescom for $1,290,000, including accrued interest.  Interest on the outstanding note accrues at the rate of 10% perannum.  Principal and all unpaid accruedinterest is payable at maturity on October 15, 2003. Spescom extended thematurity date on this note to October 1, 2004. Interest expense, accrued but unpaid on this note for the three and ninemonth periods ended June 30, 2003 totaled $32,000 and $92,000 compared to$29,000 and $67,000 for the three and nine-month periods ended June 30, 2002.

 

These notes payable are collateralized by a securityinterest in favor of both Spescom and Spescom Ltd. U.K. in respect of all ofthe Company’s assets.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

** **

***Market Rate Risk***

 

The Company’s exposure tomarket rate risk for changes in interest rates relates primarily to theCompany’s investment portfolio. The Company does not use derivative financialinstruments in its investment portfolio. The Company places its investment withhigh quality issuers and follows internally developed guidelines to limit theamount of credit exposure to any one issuer. Additionally, in an attempt tolimit interest rate risk, the Company follows guidelines to limit the averageand longest single maturity dates. The Company is adverse to principal loss andensures the safety and preservation of its invested funds by limiting default,market and reinvestment risk. The Company’s investments include money marketaccounts, as of June 30, 2003.

 

**ITEM4.    CONTROLS AND PROCEDURES**

 

The Company carried out an evaluation required by Rule13a-15(b) of the Exchange Act, under the supervision and with the participationof its principal executive officer and principal financial officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on this evaluation, the Company’sprincipal executive officer and principal financial officer concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information required to be included in its periodic SECreports.  It should be noted that thedesign of any system of controls is based in part upon certain assumptions, andthere can be no assurance that any design will succeed in achieving its statedgoals.  During the most recent fiscalquarter, there has not occurred any change in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

***Item 1 – Legal Proceedings***

 

The Company is involvedfrom time to time in litigation arising in the normal course of business.Management believes that any liability with respect to such routine litigation,individually or in the aggregate, is not likely to be material to the Company’sconsolidated financial position or results of operations.

 

***Item 4 – Submission of Matters to a Vote of Security Holders***

 

None

 

***Item 6 – Exhibitsand Reports on Form 8-K:***

 
| (a)    | Exhibits  |   |                                                                                                                                                                                                  |
|--------|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |   |                                                                                                                                                                                                  |
|   | 3.1*      |   | Registrant’s  Articles of Incorporation, as amended.                                                                                                                                             |
|   |      |   |                                                                                                                                                                                                  |
|   | 3.2*      |   | Registrant’s  Bylaws, as amended.                                                                                                                                                                |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.1      |   | Lease  between CFD-Mesa Ridge Partners and Altris Software, Inc., dated April 1,  2003.                                                                                                               |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.2  (1) |   | 10.0%  promissory note due October 15, 2003 in principal amount of $1,235,076 issued  by Altris Software, Inc. to Spescom Limited, a South African corporation on  February 15, 2002.                 |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.3  (2) |   | 10.0%  promissory note due October 15, 2003 in principal amount of $1,810,383 issued  by Altris Software, Inc. to Spescom Limited, a United Kingdom corporation, on  February 15, 2002.               |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.4  (3) |   | Security  Agreement between Altris Software, Inc. and Spescom Limited, a United Kingdom  corporation, and Spescom Limited, a South African corporation, dated February  15, 2002.                     |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.5  (4) |   | 10%  promissory note due upon demand in principal amount of $400,000 issued by  Altris Software, Inc. to Spescom Limited, a United Kingdom corporation, on  March 15, 2002.                           |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.6  (5) |   | Security  Agreement dated March 15, 2002 between Altris Software, Inc., a California  corporation, and Spescom Limited, a United Kingdom corporation.                                                 |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.7  (6) |   | Pledge  Agreement dated March 15, 2002 by and between Altris Software, Inc., a  California corporation, Spescom Limited, a United Kingdom corporation, and  Solomon Ward Seidenwurm & Smith, LLP. |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.8 (7)  |   | 10.0% promissory  note due upon demand in principal amount of $500,000 issued by Altris  Software, Inc. to  Spescom Limited, a United Kingdom corporation, on April 19, 2002.                         |
|   |      |   |                                                                                                                                                                                                  |
|   | 10.9 (8)  |   | 10.0% promissory  note due upon demand in principal amount of $700,000 issued by Altris  Software, Inc. to Spescom Limited, a United Kingdom corporation, on May 31,  2002.                           |
|   |      |   |                                                                                                                                                                                                  |
|   | 31.1      |   | Certification  Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange  Act of 1934.                                                                                               |
|   |      |   |                                                                                                                                                                                                  |
|   | 31.2      |   | Certification  Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange  Act of 1934.                                                                                               |

 

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|   | 32.1                                                                                        |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |
|--------|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                        |   |                                                                                                                      |
|   | 32.2                                                                                        |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |                                                                                        |   |                                                                                                                      |
| (b)    | Reports on Form  8-K.                                                                       |
|   |                                                                                        |   |                                                                                                                      |
|   | No Reports on  Form 8-K have been filed during the quarterly period covered by this report. |
|        |                                                                                             |        |                                                                                                                           |  |

 

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(1)                                  Incorporatedby reference to Exhibit 10.28 to the Form 10-Q filed on May 15, 2002.

(2)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(3)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(4)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(5)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(6)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(7)                                  Incorporatedby reference to Exhibit 10.34 to the Form 10-Q filed on August 14, 2002.

(8)                                  Incorporatedby reference to Exhibit 10.35 to the Form 10-Q filed on August 14, 2002.

 

*                                         Incorporatedherein by this reference from previous filings with the Securities and ExchangeCommission.

 

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### **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| **Signature**    |   | **Title**                         |                                             | **Date**        |
|------------------|--------|-----------------------------------|--------------------------------------------------|-----------------|
|             |   |                              |                                             |            |
| /s/ Carl Mostert |   |                              | Director and Chief Executive Officer (Principal  |            |   |
| Carl Mostert     |   | Executive Officer)                |                                             | August 14, 2003 |
|             |   |                              |                                             |            |
| /s/ John W. Low  |   |                              | Chief Financial Officer and Secretary (Principal |            |   |
| John W. Low      |   | Financial and Accounting Officer) |                                             | August 14, 2003 |

 

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