**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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

 

**Forthe Quarterly Period Ended June 30, 2002**

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

 

**CommissionFile Number 0-15935**

 

**ALTRIS SOFTWARE, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **CALIFORNIA**                                         |   | **95-3634089**      |
|--------------------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of                       |   | (I.R.S. Employer    |
| incorporation or  organization)                        |   | Identification No.) |
|                                                   |   |                |
| **9339  CARROLL PARK DRIVE, SAN DIEGO, CA 92121**      |
| (Address of principal  executive offices and zip code) |
|                                                   |   |                |
| **(858)  625-3000**                                    |
| (Registrants 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

 

Number of sharesof Common Stock outstanding at August 10, 2002:  30,841,590

 

Number ofSequentially Numbered Pages: 22

 

 

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**ALTRISSOFTWARE, INC.**

 

**INDEX**

 
| PART I.  |              | FINANCIAL INFORMATION                                                                       |
|----------|-------------------|---------------------------------------------------------------------------------------------|
|     |              |                                                                                        |   |
|     | Item 1.           | Consolidated Financial Statements                                                           |
|     |              |                                                                                        |   |
|     |              |                                                                                        | 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 |
|     |              |                                                                                        |   |
| PART II. | OTHER INFORMATION |
|          |                   |                                                                                             |  |  |

 

2

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**ALTRIS SOFTWARE, INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                         |   | **June 30,  2002** |       | **September  30,  2001** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------------|------------|
|                                                                                         |   | **(Unaudited)**    | ** ** |                     | ** ** |
| **ASSETS**                                                                                   |   |               | ** ** |                     | ** ** |
| Current assets:                                                                              |   |               |       |                     |       |
| Cash and cash equivalents                                                                    |   | $                  | 364,000    |                     | $          | 144,000 |   |
| Receivables, net                                                                             |   | 883,000            |       | 1,150,000                |       |
| Other current assets                                                                         |   | 304,000            |       | 412,000                  |       |
| Total current assets                                                                         |   | 1,551,000          |       | 1,706,000                |       |
|                                                                                         |   |               |       |                     |       |
| Property and equipment, net                                                                  |   | 239,000            |       | 313,000                  |       |
| Computer software, net                                                                       |   | 1,517,000          |       | 2,164,000                |       |
| Other assets                                                                                 |   | 72,000             |       | 73,000                   |       |
| Total assets                                                                                 |   | $                  | 3,379,000  |                     | $          | 4,256,000 |   |
|                                                                                         |   |               |       |                     |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                                              |   |               | ** ** |                     | ** ** |
|                                                                                         |   |               |       |                     |       |
| Current liabilities:                                                                         |   |               |       |                     |       |
| Accounts payable                                                                             |   | $                  | 1,379,000  |                     | $          | 958,000 |   |
| Accrued liabilities                                                                          |   | 1,209,000          |       | 1,596,000                |       |
| Notes payable to Spescom Ltd.                                                                |   | 1,620,000          |       | —                   |       |
| Deferred revenue                                                                             |   | 1,802,000          |       | 1,620,000                |       |
| Total current liabilities                                                                    |   | 6,010,000          |       | 4,174,000                |       |
|                                                                                         |   |               |       |                     |       |
| Notes payable less current portion to Spescom Ltd.                                           |   | 3,231,000          |       | 1,377,000                |       |
| Total liabilities                                                                            |   | 9,241,000          |       | 5,551,000                |       |
|                                                                                         |   |               |       |                     |       |
| Shareholders’ Deficit:                                                                  |   |               |       |                     |       |
| Common stock, no par value, 40,000,000 shares authorized; 30,841,590  issued and outstanding |   | 74,465,000         |       | 73,838,000               |       |
| Common stock warrants                                                                        |   | 133,000            |       | 718,000                  |       |
| Accumulated other comprehensive loss                                                         |   | (124,000           | )          | (33,000                  | )          |
| Accumulated deficit                                                                          |   | (80,336,000        | )          | (75,818,000              | )          |
| Total shareholders’ deficit                                                             |   | (5,862,000         | )          | (1,295,000               | )          |
|                                                                                         |   |               |       |                     |       |
| Total liabilities and shareholders’ deficit                                             |   | $                  | 3,379,000  |                     | $          | 4,256,000 |   |

 

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

 

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**ALTRISSOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                       |   | **For the  three months  ended June 30,** |       | **For the  nine months  ended June 30,** |       |
|------------------------------------------------------------|--------|-------------------------------------------|------------|------------------------------------------|------------|
|                                                       |   | **2002**                                  | ** ** | **2001**                                 | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenues:                                                  |   |                                      |       |                                     |       |   |   |   |   |
| Licenses                                                   |   | $                                         | 601,000    |                                     | $          | 1,749,000 |   | $ | 1,248,000 |   | $ | 4,617,000 |   |
| Services and other                                         |   | 1,230,000                                 |       | 1,385,000                                |       | 3,868,000 |   | 4,727,000 |   |
| Total revenues                                             |   | 1,831,000                                 |       | 3,134,000                                |       | 5,116,000 |   | 9,344,000 |   |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Cost of revenues:                                          |   |                                      |       |                                     |       |   |   |   |   |
| Licenses                                                   |   | 290,000                                   |       | 272,000                                  |       | 899,000 |   | 1,067,000 |   |
| Services and other                                         |   | 664,000                                   |       | 960,000                                  |       | 2,526,000 |   | 2,949,000 |   |
| Total cost of revenues                                     |   | 954,000                                   |       | 1,232,000                                |       | 3,425,000 |   | 4,016,000 |   |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Gross profit                                               |   | 877,000                                   |       | 1,902,000                                |       | 1,691,000 |   | 5,328,000 |   |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Operating expenses:                                        |   |                                      |       |                                     |       |   |   |   |   |
| Research and development                                   |   | 342,000                                   |       | 516,000                                  |       | 1,535,000 |   | 1,455,000 |   |
| Marketing and sales                                        |   | 573,000                                   |       | 1,063,000                                |       | 2,911,000 |   | 2,959,000 |   |
| General and administrative                                 |   | 411,000                                   |       | 426,000                                  |       | 1,523,000 |   | 1,137,000 |   |
|                                                       |   | 1,326,000                                 |       | 2,005,000                                |       | 5,969,000 |   | 5,551,000 |   |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Loss from operations                                       |   | (449,000                                  | )          | (103,000                                 | )          | (4,278,000 | ) | (223,000 | ) |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Interest and other income                                  |   | 1,000                                     |       | 16,000                                   |       | 6,000 |   | 54,000 |   |
| Interest and other expense                                 |   | (106,000                                  | )          | (7,000                                   | )          | (246,000 | ) | (12,000 | ) |
| Gain on sale of interest in subsidiary                     |   | —                                    |       | —                                   |       | — |   | 125,000 |   |
| Net loss                                                   |   | $                                         | (554,000   | )                                        | $          | (94,000 | ) | $ | (4,518,000 | ) | $ | (56,000 | ) |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Basic net loss per common share                            |   | $                                         | (0.02      | )                                        | $          | (0.00 | ) | $ | (0.15 | ) | $ | (0.00 | ) |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Diluted net loss per common share                          |   | $                                         | (0.02      | )                                        | $          | (0.00 | ) | $ | (0.15 | ) | $ | (0.00 | ) |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Shares used in computing basic Net loss per common share   |   | 30,842,000                                |       | 30,842,000                               |       | 30,842,000 |   | 30,776,000 |   |
|                                                       |   |                                      |       |                                     |       |   |   |   |   |
| Shares used in computing diluted net loss per common share |   | 30,842,000                                |       | 30,842,000                               |       | 30,842,000 |   | 30,776,000 |   |

 

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

 

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**ALTRISSOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **For the  nine months  ended June 30,** |       |
|------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                         |   | **2002**                                 | ** ** | **2001** | ** ** |
| Cash flows from operating activities:                                        |   |                                     |       |   |   |
| Net loss                                                                     |   | $                                        | (4,518,000 | ) | $ | (56,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                                     |       |   |   |
| Depreciation and amortization                                                |   | 804,000                                  |       | 893,000 |   |
| Stock options issued                                                         |   | 42,000                                   |       | — |   |
| Gain on sale of interest in subsidiary                                       |   | —                                   |       | (125,000 | ) |
| Changes in assets and liabilities, net of effect of dispositions:            |   |                                     |       |   |   |
| Receivables, net                                                             |   | 287,000                                  |       | 386,000 |   |
| Other assets                                                                 |   | 219,000                                  |       | (239,000 | ) |
| Accounts payable                                                             |   | 280,000                                  |       | 24,000 |   |
| Accrued liabilities                                                          |   | (452,000                                 | )          | 33,000 |   |
| Deferred revenue                                                             |   | 163,000                                  |       | (2,046,000 | ) |
| Net cash used in operating activities                                        |   | (3,175,000                               | )          | (1,130,000 | ) |
|                                                                         |   |                                     |       |   |   |
| Cash flows from investing activities:                                        |   |                                     |       |   |   |
| Purchases of property and equipment                                          |   | (23,000                                  | )          | (30,000 | ) |
| Purchases of software                                                        |   | (56,000                                  | )          | — |   |
| Net cash used in investing activities                                        |   | (79,000                                  | )          | (30,000 | ) |
|                                                                         |   |                                     |       |   |   |
| Cash flows from financing activities:                                        |   |                                     |       |   |   |
| Proceeds from shareholder loan                                               |   | 3,474,000                                |       | — |   |
| Proceeds from exercise of stock options                                      |   | —                                   |       | 3,000 |   |
| Net cash provided by financing activities                                    |   | 3,474,000                                |       | 3,000 |   |
|                                                                         |   |                                     |       |   |   |
| Effect of exchange rate changes on cash                                      |   | —                                   |       | (23,000 | ) |
|                                                                         |   |                                     |       |   |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 220,000                                  |       | (1,180,000 | ) |
| Cash and cash equivalents at beginning of period                             |   | 144,000                                  |       | 1,808,000 |   |
|                                                                         |   |                                     |       |   |   |
| Cash and cash equivalents at end of period                                   |   | $                                        | 364,000    |   | $ | 628,000 |   |

 

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

 

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ALTRIS SOFTWARE, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS

(Unaudited)

 

Note 1 - Basis of Presentation

 

The consolidated financial statements include the accounts of AltrisSoftware, Inc. and its wholly owned subsidiaries (the “Company”). Allsignificant intercompany balances and transactions have been eliminated. In thefirst quarter of fiscal 2001, the Company acquired certain assets andliabilities of Spescom Ltd. U.K. (formerly Altris Software Limited) alongwith Spescom Ltd. U.K.’s document management business. Spescom Ltd.UK is a wholly owned subsidiary of Spescom Ltd., which became the majorityshareholder in the Company in April 2000. (See Note 3.)

 

The accompanyingconsolidated statements of operations and cash flows for the three and ninemonths ended June 30, 2002 and 2001 are unaudited. The consolidated financialstatements and related notes have been prepared in accordance with generallyaccepted accounting principles applicable to interim periods.  In the opinion of management, the consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of the consolidatedfinancial position, operating results and cash flows for the periods presented.

 

The informationcontained in the following Condensed Notes to the Consolidated FinancialStatements is condensed from that which would appear in the annual consolidatedfinancial statements; accordingly, the consolidated financial statementsincluded herein should be reviewed in conjunction with the consolidatedfinancial statements and related notes thereto contained in the Company’sReport on Form 10-K for the year ended September 30, 2001.  It should be understood that the accountingmeasurements at an interim date inherently involve greater reliance on estimatesthan at year-end.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results expected for the entire year.

 

REVENUE RECOGNITION

 

The Companyrecognizes revenue in accordance with a wide-ranging set of standards andinterpretations of those standards under accounting principles generallyaccepted in the United States of America, consisting principally of:

 

•                                          Statementof Position (SOP) No. 97-2, “Software Revenue Recognition,” issued by theAmerican Institute of Certified Public Accountants (AICPA)

 

•                                          AICPASOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions,”

 

•                                          StaffAccounting Bulletin No. 101, “Revenue Recognition in Financial Statements,”issued by the United States Securities and Exchange Commission

 

The Company entersinto contractual arrangements with end users of its products that may includesoftware licenses, maintenance services, consulting services, or variouscombinations thereof, including the sale of such elements separately. For eacharrangement, revenues are recognized when both parties have signed anagreement, the fees to be paid by the customer are fixed or determinable,collection of the fees is probable, delivery of the product has occurred and noother significant obligations on the part of the Company remain.

 

Formultiple-element arrangements, each element of the arrangement is analyzed andthe Company allocates a portion of the total fee under the arrangement to theindividual elements based on the fair value of the element, regardless of anyseparate prices stated within the contract for each element. Fair value isgenerally

 

6

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considered the price acustomer would be required to pay if the element were to be sold separately.The Company applies the “residual method” as allowed under SOP No. 98-9 inaccounting for any element of an arrangement that remains undelivered.

 

License Revenues:Amounts allocated to software license revenues are recognized at the time ofshipment of the software when fair value for any undelivered elements isdeterminable and all the other revenue recognition criteria discussed abovehave been met.

 

Consulting ServiceRevenues: Consulting service revenues are comprised of consulting andimplementation services and, to a limited extent, training. Consulting servicesare generally sold on a time-and-materials or fixed fee basis and can includeservices ranging from software installation to data conversion to allow thesoftware to operate in customized environments. Services are generallyseparable from the other elements under the same arrangement since theperformance of the services are not essential to the functionality of thesoftware and are described in the contract such that the total price of thearrangement would be expected to vary as the result of the inclusion orexclusion of the services. Revenues for these services, as well as fortraining, are generally recognized as the services are performed for time andmaterials contracts. Contract revenues forfixed fee contracts or programs requiring specialized systems are recognizedusing the percentage-of-completion method of accounting, primarily based oncontract labor hours incurred to date compared with total estimated labor hoursat completion. Provisions for anticipated contract losses are recognized at thetime they become known.

 

MaintenanceService Revenues: Maintenance service revenues consist primarily of fees forproviding unspecified software upgrades on a when-and-if-available basis andtechnical support over a specified term, which is typically twelve months.Maintenance revenues are typically paid in advance and are recognized on astraight-line basis over the term of the contract.

 

Revenues on salesmade by the Company’s resellers are generally recognized upon shipment of theCompany’s software to the reseller, when the reseller has an identified enduser and all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors, all the revenue recognitioncriteria have been met upon delivery of the product to the distributor and,accordingly, revenues are recognized at that time. The Company does not offer aright of return on its products.

 

Foreign CurrencyTranslation

 

The financial statements of the foreignsubsidiary are prepared in its local currency and translated into U.S. dollarsbased on the current exchange rate at the end of the period for the balancesheet and a weighted-average rate for the period on the statement ofoperations. Accumulated translation adjustments of $(124,000) and $(33,000) arerecorded at June 30, 2002 and September 30, 2001, respectively and arereflected as accumulated other comprehensive loss in Shareholders’ Deficit.Foreign currency transaction gains and losses are included in net loss.

 

Note 2 – Statement of Cash Flows

 

For the ninemonths ended June 30, 2001, the following assets and liabilities, attributableto the acquisition of Spescom UK, have been excluded from the cash flowstatement (see Note 3):

 

| Accounts receivable, net     |   | $        | 721,000  |   |
|------------------------------|--------|----------|----------|--------|
| Other assets                 |   | 26,000   |     |
| Property and  equipment, net |   | 103,000  |     |
| Accounts payable             |   | (192,000 | )        |
| Accrued  liabilities         |   | (228,000 | )        |
| Deferred revenue             |   | (665,000 | )        |
| Net liabilities  assumed     |   | $        | (235,000 | )      |

 

7

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The following is additional cash flow information for the nine monthsended June 30:

 
|                                      |   | **2002** |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
| Supplemental cash flow information:       |   |     |   |     |   |
| Interest paid                             |   | $        | 4,000  |     | $      | 12,000 |   |
|                                      |   |     |   |     |   |
| Schedule of noncash financing activities: |   |     |   |     |   |
| Stock Options Granted to Consultant       |   | $        | 42,000 |     | $      | — |   |

 

Note 3 – Spescom Transaction and Related Parties

 

In May 1999, the Companycompleted a transaction with Spescom Ltd. (“Spescom”), whereby Spescom acquireda 60% ownership interest in the Company’s former United Kingdom subsidiary,Altris Software Ltd. (“ASL”). In April 2000, the Company sold its remaining 40%ownership in ASL to Spescom. For the nine months ended June 30, 2001 theCompany recognized a gain of $125,000, which it had previously deferred,relating to potential warranty claims arising from the sale of ASL.

 

Inthe first quarter of 2001, the Company acquired certain assets and liabilitiesof Spescom Ltd. U.K. (formerly ASL) along with Spescom Ltd. U.K.’s documentmanagement business. Spescom Ltd. U.K. is a wholly owned subsidiary of Spescom,which became the majority shareholder in the Company in April 2000. Prior tothe acquisition, Spescom Ltd. U.K. had been the Company’s exclusive distributorof the Company’s eB product suite outside North, Latin and South America. Inexchange for the assets and the assumption of certain liabilities of SpescomLtd. U.K., the Company issued 550,000 shares of its common stock to Spescom.The net liabilities assumed of $235,000 were recorded as a charge againstcommon stock.

 

In November 2000 Spescompurchased $530,000 worth of software from the Company. Under a royaltyarrangement, Spescom also resells certain of the Company’s software. For thethree and nine month periods ended June 30, 2002, the Company recognizedroyalty revenue of $0 and $9,000 compared to $30,000 and $38,000 for the threeand nine month periods ended June 30, 2001, arising from this arrangement.

 

Spescom and the Companyhave entered into a license agreement pursuant to which Spescom has licensed tothe Company the right to use the name “Spescom” and to use a trademark owned bySpescom related to certain computer software. The Company will not pay anyroyalties to Spescom in connection with this license. The license is for anindefinite term, but is terminable by either party upon 60 days prior writtennotice. Under the license agreement, Spescom has agreed to indemnify and holdharmless the Company and its directors, officers, employees and agents againstliabilities arising from any claim brought against the Company that allegesthat Spescom’s or the Company’s use of the trademark being licensed infringesthe rights of any third party, provided that the Company is in material compliancewith the provisions of the license agreement.

 

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Related party liabilitiesconsist of the following:

 
|                                            |   | **June 30,  2002** |       | **September  30,  2001** |       |
|-------------------------------------------------|--------|--------------------|------------|--------------------------|------------|
|                                            |   | **(Unaudited)**    | ** ** |                     | ** ** |
|                                            |   |               |       |                     |       |
| Current  liability:                             |   |               |       |                     |       |
| Notes payable to Spescom Ltd. United Kingdom    |   | $                  | 1,620,000  |                     | $          | — |   |
| Long-term  liabilities:                         |   |               |       |                     |       |
| Loan payable  —Spescom Ltd., South Africa  |   | $                  | 1,276,000  |                     | $          | 1,377,000 |   |
| Loan payable  —Spescom Ltd. United Kingdom |   | 1,955,000          |       | —                   |       |
|                                            |   |               |       |                     |       |
|                                            |   | $                  | 3,231,000  |                     | $          | 1,377,000 |   |

 

At June 30, 2002, theCompany had three demand notes payable for $400,000, $500,000 and $700,000,respectively, each bearing an annual interest rate of 10%. The notes plusaccrued interest are shown in the above table as $1,620,000. Interest expenseon the notes for the nine months ended June 30, 2002 was $20,000.  The Company continues to rely upon thisfinancing from Spescom for its operating needs.

 

Spescom Ltd., SouthAfrica loaned $1,377,000, including accrued interest, to the Company during thefiscal year ended September 30, 2001. As of June 30, 2002 the balance owed onthis loan was $1,276,000. Interest on the outstanding loan amount accrues atthe rate of  10.0% per annum and ispayable at maturity on October 15, 2003. The balances in the table includeaccrued interest due.  Interest expenseon this loan totaled $67,000 and $4,000 for the nine months ended June 30, 2002and 2001, respectively.

 

Spescom Ltd. UnitedKingdom loaned $1,955,000, including accrued interest, to the Company duringthe nine months ended June 30, 2002. This loan also bears interest at aninterest rate of 10.0% per annum, payable at maturity, on October 15,2003.  Interest expense on this loantotaled $172,000 for the nine months ended June 30, 2002.

 

The notes payable arecollateralized by a security interest in favor of both Spescom Ltd. SouthAfrica and Spescom Ltd. United Kingdom in respect of all of the Company’sassets.

 

Note 4 –Receivables

 

Receivables consist ofthe following:

 
|                                 |   | **June 30,  2002** |       | **September  30,  2001** |       |
|--------------------------------------|--------|--------------------|------------|--------------------------|------------|
|                                 |   | **(Unaudited)**    | ** ** |                     | ** ** |
|                                 |   |               |       |                     |       |
| Billed receivables                   |   | $                  | 1,011,000  |                     | $          | 1,240,000 |   |
| Less allowance for doubtful accounts |   | (128,000           | )          | (90,000                  | )          |
|                                 |   | $                  | 883,000    |                     | $          | 1,150,000 |   |

## ** **

## **Note 5 – Reconciliation ofNet Income (Loss) and Shares Used in Per Share Computations:**

 

Basic net loss per commonshare is computed as net loss divided by the weighted average number of commonshares outstanding during the period. Diluted net loss per common share is computed as net loss divided by theweighted average number of common shares and potential common shares, using thetreasury

 

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stock method, outstanding during the period andassumes conversion into common stock at the beginning of each period of alloutstanding shares of convertible preferred stock.  Computations of basic and diluted 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,** |       |
|-------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|------------------------------------------|------------|
|                                                                                            |   | **2002**                                  | ** ** | **2001**                                 | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net loss used in computing basic and diluted net loss per share                                 |   | $                                         | (554,000   | )                                        | $          | (94,000 | ) | $ | (4,518,000 | ) | $ | (56,000 | ) |
|                                                                                            |   |                                      |       |                                     |       |   |   |   |   |
| Shares Used:                                                                                    |   |                                      |       |                                     |       |   |   |   |   |
|                                                                                            |   |                                      |       |                                     |       |   |   |   |   |
| Weighted average common shares outstanding used in computing basic  net loss per common share   |   | 30,842,000                                |       | 30,842,000                               |       | 30,842,000 |   | 30,776,000 |   |
|                                                                                            |   |                                      |       |                                     |       |   |   |   |   |
| Weighted average common shares outstanding used in computing diluted  net loss per common share |   | 30,842,000                                |       | 30,842,000                               |       | 30,842,000 |   | 30,776,000 |   |
|                                                                                                 |        |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

Based on the above table,the basic and diluted loss per share is $0.003 for the three months endingJune 30, 2001. For the nine months ending June 30, 2001, the basicand diluted loss per share is $.002. For financial statement presentationpurposes, we have rounded the basic and diluted loss per share for the threeand nine months ended June 30, 2001 to $0.00.

 

Potentially dilutivestock options to purchase up to 199,619 and 375,331 shares of the Company’scommon stock, with weighted average prices of $0.44 and $1.11 were outstandingat June 30, 2002 and 2001, respectively. Warrants to purchase 100,000 shares ofthe Company’s stock at an average exercise price of $0.72 per share wereoutstanding at June 30, 2002. Warrants to purchase 300,000 shares of theCompany’s stock at an average exercise price of $1.90 per share and warrants topurchase 100,000 shares of the Company’s stock at an average exercise price of$0.72 per share were outstanding at June 30, 2001. These options and warrantswere not included in the computation of diluted loss per common share for thethree and nine month periods ended June 30, 2002 and 2001 because their effectwas antidulitive.

 

Note 6 – Segmentand Geographic Information

 

The Company has one businesssegment which consists of the development and sale of a suite of client/serverdocument management software products.

 

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Revenues for thethree and nine month periods ended June 30, 2002 and 2001, by customerlocation, are as follows:

 
|                             |   | **For the  three months ended  June 30,** |       | **For the  nine months ended  June 30,** |       |
|----------------------------------|--------|-------------------------------------------|------------|------------------------------------------|------------|
|                             |   | **2002**                                  | ** ** | **2001**                                 | ** ** | **2002** | ** ** | **2001** | ** ** |
|                             |   |                                      |       |                                     |       |   |   |   |   |
| United States                    |   | $                                         | 731,000    |                                     | $          | 2,360,000 |   | $ | 2,439,000 |   | $ | 5,782,000 |   |
| Europe, primarily United Kingdom |   | 1,038,000                                 |       | 753,000                                  |       | 2,444,000 |   | 2,881,000 |   |
| Other International              |   | 62,000                                    |       | 21,000                                   |       | 233,000 |   | 681,000 |   |
|                             |   | $                                         | 1,831,000  |                                     | $          | 3,134,000 |   | $ | 5,115,000 |   | $ | 9,344,000 |   |

 

Note 7- Recent Accounting Pronouncements

 

InJuly 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations” (Statement 141) which supersedes APB Opinion No. 16,“Business Combinations” and SFAS No. 38, “Accounting for PreacquisitionContingencies of Purchased Enterprises.” Statement 141 addresses financialaccounting and reporting for business combinations and requires that allbusiness combinations within the scope of Statement 141 be accounted for usingonly the purchase method. Statement 141 is required to be adopted for allbusiness combinations initiated after June 30, 2001. The adoption ofStatement 141 has not had a material effect on the financial statements.

 

Alsoin July 2001, the FASB issued SFAS No. 142, “Goodwill and OtherIntangible Assets” (Statement 142) which supercedes APB Opinion No. 17,“Intangible Assets.” Statement 142 addresses how intangible assets that areacquired individually or with a group of other assets (but not those acquiredin a business combination) should be accounted for in financial statements upontheir acquisition. Statement 142 also addresses how goodwill and otherintangible assets should be accounted for after they have been initiallyrecognized in the financial statements. Statement 142 requires that goodwilland intangible assets with indefinite useful lives no longer be amortized, butinstead be tested for impairment at least annually in accordance with theprovisions of Statement 142. Statement 142 also requires that intangible assetswith definite useful lives be amortized over their respective estimated usefullives to their estimated residual values and reviewed for impairment. Theprovisions of Statement 142 are required to be applied starting with fiscalyears beginning after December 15, 2001. Statement 142, which is requiredto be applied at the beginning of an entity’s fiscal year, is to be applied toall goodwill and other intangible assets recognized in the financial statementsat that date. The adoption of Statement 142 has not had a material effect onthe financial statements.

 

During August 2001, theFASB issued Statement of Financial Accounting Standards No. 143, “Accountingfor Asset Retirement Obligations,” (“SFAS No. 143”). SFAS No. 143 addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. It applies to all entities and legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development and/or normal operation of a long-lived assets, except for certainobligations of lessees. SFAS No. 143 amends FASB Statement No. 19, “FinancialAccounting and Reporting by Oil and Gas Producing Companies,” and is effectivefor fiscal years beginning after April 1, 2003. Management believes that the adoption of Statement 143 will not have amaterial effect on the Company’s financial statements.

 

During August 2001, theFASB issued Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). SFASNo. 144 addresses financial accounting and reporting for the impairment ordisposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto

 

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be Disposed Of,” and the accounting and reportingprovision of APB Opinion No. 30, “Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual, and Infrequently Occurring Events and Transactions,”for the disposal of a segment of a business (as previously defined in thatOpinion). SFAS No. 144 is effective for fiscal years beginning after April 1,2002. The Company is in the process of evaluating the financial statementimpact of adoption of SFAS No. 144.

 

Note 8 – Comprehensive Loss

 
|                                          |   | **Three  Months Ended  June 30,** |       | **Nine  Months Ended  June 30,** |       |
|-----------------------------------------------|--------|-----------------------------------|------------|----------------------------------|------------|
|                                          |   | **2002**                          | ** ** | **2001**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                          |   |                              |       |                             |       |   |   |   |   |
| Net loss                                      |   | $                                 | (554,000   | )                                | $          | (94,000 | ) | $ | (4,518,000 | ) | $ | (56,000 | ) |
| Other comprehensive income (loss):            |   |                              |       |                             |       |   |   |   |   |
| Foreign currency translation gain adjustments |   | (124,000                          | )          | 30,000                           |       | (91,000 | ) | 34,000 |   |
| Comprehensive loss                            |   | $                                 | (678,000   | )                                | $          | (64,000 | ) | $ | (4,609,000 | ) | $ | (22,000 | ) |

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION

AND RESULTS OF OPERATIONS

 

THREE AND NINEMONTH PERIODS ENDED JUNE 30, 2002 COMPARED WITH THREE AND NINE MONTH PERIODSENDED JUNE 30, 2001.

 

This report containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from historical results or anticipated results, including those setforth under “Certain Factors That May Affect Future Results” below andelsewhere in, or incorporated by reference into, this report.

 

CRITICAL ACCOUNTING POLICIES

 

The consolidatedfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States of America. As such, management isrequired to make judgments, estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. The significant accounting policies which are most criticalto aid in fully understanding and evaluating reported financial results includethe following:

 

Revenue Recognition

 

The Company enters intocontractual arrangements with end users that may include licensing of theCompany’s software products, product support and maintenance services,consulting services or various combinations thereof, including the sale of suchproducts or services separately. The Company’s accounting policies regardingthe recognition of revenue for these contractual arrangements is fully describedin Note 1 of Notes to Consolidated Financial Statements.

 

The Company considersmany factors when applying accounting principles generally accepted in theUnited States of America related to revenue recognition. These factors include,but are not limited to:

 

•                                          Theactual contractual terms, such as payment terms, delivery dates, and pricing ofthe various product and service elements of a contract

 

•                                          Availabilityof products to be delivered

 

•                                          Timeperiod over which services are to be performed

 

•                                          Creditworthinessof the customer

 

•                                          Thecomplexity of customizations to the Company’s software required by servicecontracts

 

•                                          Thesales channel through which the sale is made (direct, VAR, distributor, etc.)

 

•                                          Discountsgiven for each element of a contract

 

•                                          Anycommitments made as to installation or implementation “go live” dates

 

Each of the relevantfactors is analyzed to determine its impact, individually and collectively withother factors, on the revenue to be recognized for any particular contract witha customer. Management is required to make judgments regarding the significanceof each factor in applying the revenue recognition standards, as well aswhether or not each factor complies with such standards. Any misjudgment orerror by management in its

 

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evaluation of the factors and the application of thestandards, especially with respect to complex or new types of transactions,could have a material adverse effect on the Company’s future operating results.

 

Allowance for Doubtful Accounts

 

The Company sells itsproducts directly to end users, generally requiring a significant up-frontpayment and remaining terms appropriate for the creditworthiness of thecustomer. The Company also sells its products to VARs and other softwaredistributors generally under terms appropriate for the creditworthiness of theVAR or distributor. Management believes that no significant concentrations ofcredit risk existed at June 30, 2002. Receivables from customers are generallyunsecured. 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 knowncustomer collections issues. If actual bad debts are greater then the reservescalculated based on historical trends and known customer issues, the Companymay be required to book additional bad debt expense which could have a materialadverse impact on our operating results for the periods in which suchadditional expense occurs.

 

Capitalized Software Development Costs

 

Software developmentcosts incurred subsequent to the determination of technological feasibility andmarketability of a software product are capitalized. Amortization ofcapitalized software development costs commences when the products areavailable for general release. Amortization is determined on a product byproduct basis using the greater of a ratio of current product revenues toprojected current and future product revenues or an amount calculated using thestraight-line method over the estimated economic life of the product, generallythree to five years. In addition to in-house software development costs, theCompany purchases certain software from third-party software providers andcapitalizes such costs in software development costs. The Company continuallyevaluates the recoverability of its capitalized software development costs andconsiders any events or changes in circumstances that would indicate that thecarrying amount of an asset may not be recoverable. Any material changes incircumstances, such as a large decrease in revenues or the discontinuation of aparticular product line could require future write-downs in the Company’scapitalized software development costs and could have a material adverse impacton our operating results for the periods in which such write-downs occur.

 

RESULTS OF OPERATIONS

 

Revenues

 

Revenues for the threeand nine month periods ended June 30, 2002 were $1,831,000 and $5,116,000 ascompared to $3,134,000 and $9,344,000 for the three and nine month periodsended June 30, 2001.

 

For the three monthsended June 30, 2002 revenues consisted of $601,000 (33%) in software licensesand $1,230,000 (67%) related to services and other revenue. This compares tosoftware license revenues of $1,749,000 (56%) and services and other revenue of$1,385,000 (44%) for the three months ended June 30, 2001. For the nine monthsended June 30, 2002 revenues consisted of $1,248,000 (24%) in software licenserevenues and $3,868,000 (76%) in services and other revenue. This compares tosoftware license revenues of $4,617,000 (49%) and services and other revenue of$4,727,000 (51%) for the nine months ended June 30, 2001. License revenue forthe nine months ended June 30, 2001 included a license to Spescom of $530,000.

 

Software license revenuesdecreased $1,148,000 and $3,369,000 for the three and nine month periods endedJune 30, 2002 compared to the three and nine month periods ended June 30, 2001.The decrease is due to lower sales of the eB product, which management believesis a result of customers deferring capital expenditures due to an economicslowdown in the United States.

 

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Revenues generated fromservices decreased $155,000 and $859,000 for the three and nine month periodsended June 30, 2002 over the three and nine month periods ended June 30, 2001.Management attributes this decline to the decline in software sales, whichreduced the potential for service fees for implementing the eB product.

 

A small number ofcustomers has typically accounted for a large percentage of the Company’sannual revenue. One customer accounted for 18% of total revenue for the ninemonths ended June 30, 2002 and another customer accounted for 18% of revenuefor the nine month period ended June 30, 2001. One consequence of this dependence 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.  Additionally, a significant portion of theCompany’s revenues has historically been derived from the sale of systems tonew customers.

 

Cost of Revenues

 

Gross profit consists ofgross profit from licenses and gross profit from services and other. Grossprofit as a percentage of revenue was 48% and 33% for the three and nine monthperiods ended June 30, 2002 compared to gross profit percentages of 61% and 57%for the three and nine month periods ended June 30, 2001. The decrease in grossprofit for the three and six month periods ended June 30, 2002 was due to theamortization of software costs over lower software license revenues.

 

Cost of license revenuesconsists of costs associated with reselling third-party software products andamortization of internal software development costs. Gross profit from licenserevenues as a percentage of license revenues was 52% and 28% for the three andnine month periods ended June 30, 2002 compared to 84% and 77% for the threeand nine months ended June 30, 2001. The decrease to 52% from 84% and to 28%from 77% was the result of a decrease in sales of eB software. As salesdecline, our fixed costs remain constant and result in a lower gross profitpercentage on licenses sold.

 

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.  Gross profit from services and other revenueas a percentage of services and other revenue was 46% and 35% for the three andnine month periods ended June 30, 2002 compared to 31% and 38% for the threeand nine month periods ended June 30, 2001. The increase in the gross profit margin from services and other revenuefor the three month period ended June 30, 2002 was due principally to lowerpersonnel and related costs associated with performing services, thereforeachieving a higher amount of profit for less personnel cost. The decrease ingross profit for the nine month period was due to higher personnel and relatedcosts for the nine month period ending June 30, 2002 than in the prior yearsame period.  In response to the lowerservice revenues, the Company reduced the number of service personnel and theirassociated costs in March of 2002 in an effort to bring personnel related costsof services more in line with the lower revenues currently being achieved.

 

The Company’s softwareand services are sold at a significantly higher margin than third partyproducts which are resold at a lower gross profit percentage in order for theCompany to remain competitive in the marketplace for such third partyproducts.  Gross profit percentages canfluctuate quarterly based on the revenue mix of Company software, services andthird party software or hardware.

 

Operating Expenses

 

Research and developmentexpense for the three and nine month periods ended June 30, 2002 was $342,000and $1,535,000 as compared to $516,000 and $1,455,000 for the three and ninemonth periods ended June 30, 2001. The decreases in research and developmentfor the three month period ended June 30, 2002 was primarily due to decreasesin personnel and associated costs as a result of a reduction in personnel inMarch 2002. The reductions were implemented with a view to retaining theCompany’s core technological

 

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competencies and maintaining its abilities to continueto enhance its eB product suite. As a result of these changes, research anddevelopment expense is expected to decline in future quarters. The increase inresearch and development for the nine month period ending June 30, 2002 ascompared to the prior year same period was a result of personnel and associatedcosts as a result of assigning personnel to development activities whereas theywere previously assigned to software implementation, sales and marketingactivities in the previous year.

 

Marketing and salesexpense for the three and nine month periods was $573,000 and $2,911,000 ascompared to $1,063,000 and $2,959,000 for the three and nine month periodsended June 30, 2001. Due to the continued downturn in the economy and thedecrease in revenues in March 2002, the Company reduced its sales and marketingpersonnel and associated costs, along with certain marketing expenditures, inan effort to achieve a reduced level of sales and marketing expenditures, whichmanagement believes will be more in line with revenues in future quarters.These efforts have led to the decreases in the three and nine month periodsending June 30, 2002.

 

General andadministrative expense was $411,000 and $1,523,000 for the three and nine monthperiods ended June 30, 2002 as compared to $426,000 and $1,137,000 for thethree and nine month periods ended June 30, 2001. The decrease in general andadministrative expense for the three month period ending June 30, 2002 was aresult of the reduction in general and administrative personnel and theirassociated costs that took place in March 2002. Of the increase in general andadministrative expense in the nine month period ended June 30, 2002, $277,000was from severance and related personnel costs incurred in connection with thetermination of 38 employees throughout the organization. Additionally, generaland administrative expense in fiscal 2001 was comparatively lower as a resultof lowering reserves for a certain customer dispute.

 

Interest and other incomewas $1,000 and $6,000 for the three and nine month periods ended June 30, 2002as compared to $16,000 and $54,000 for the three and nine month periods endedJune 30, 2001. The decrease is primarily due to a decrease in investments in2002 as compared to 2001.

 

Interest and otherexpense was $106,000 and $246,000 for the three and nine month periods endedJune 30, 2002 as compared to $7,000 and $12,000 for the three and nine monthperiods ended June 30, 2001.  Theincrease was due to additional interest expense on the Company’s higher debtbalances during 2002 as compared to 2001.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2002, theCompany’s cash and cash equivalents totaled $364,000 as compared to $1,444,000at September 30, 2001, and its current ratio was .26 to 1. For the nine monthperiod ended June 30, 2002, cash used in operating and investing activitiestotaled $3,254,000, while cash provided by financing activities totaled$3,474,000.

 

The Company has receivedloans from Spescom in the past to meet its obligations. The outstanding balanceof its loans from Spescom increased from $1,377,000 on September 30, 2001 to$4,851,000 on June 30, 2002. Such loans are secured by all of the assets of theCompany. See “Related Party Transactions” below.

 

The funding to date hasenabled the Company to restructure its operation and meet its obligations. Inaddition, management believes that our strategic restructuring plan will enablethe Company to reduce our costs to a level that is aimed at achieving abreakeven cash flow by our fiscal year-end, while still maintaining our corecompetencies. The amounts owed to Spescom includes $1.6 million payable ondemand.  As security for the loans, the Company has granted a securityinterest in favor of Spescom in respect of all of the Company’s assets.

 

Although the Company inthe past has received funding from Spescom for working capital purposes,Spescom is not obligated to provide additional loans. Spescom’s ability toprovide future funding has been

 

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adversely affected over the past months by the generaldecline in economic conditions and a substantial decline in the value of theSouth African Rand in relation to other currencies. In addition, if Spescom isotherwise able and willing to provide additional loans on terms acceptable tothe Company, the funding of such loans may be delayed or prevented by currencyexchange regulations of the Republic of South Africa, under which Spescom isrequired to apply for and obtain the approval of the South African Reserve Bankbefore providing any funds to the Company. Moreover, the terms on which anyadditional funding may be provided are not specified and may include interestrates, security arrangements or additional equity dilution that are notacceptable to the Company or that could be materially adverse to the Company.

 

In March 2002, theCompany implemented substantial reductions in costs in an effort to achieve abreak-even level of cash flow in the near term. Management believes these costreductions will enable the Company to achieve a break-even level of cash flowby the end of the fiscal year. Although such reductions have reduced theCompany’s research and development, marketing and sales capabilities,management believes that the reduced levels of research and development,marketing and sales costs are consistent with the level of revenues currentlybeing achieved. Moreover, the Company believes such reductions were implementedwith a view to maximizing the Company’s ability to continue to maintain andsupport its eB product suite, while at the same time pursuing opportunities forsales of new eB systems to new customers. There can be no assurance that the Companywill be able to obtain sufficient orders or to achieve sufficient costreductions to enable the Company to reach a cash flow break-even level, whichwould be necessary to continue operations in the absence of further financing.

 

Net Operating Loss TaxCarryforwards

 

Asof September 30, 2001, the Company had a net operating loss carryforward(“NOL”) for federal and state income tax purposes of $28,682,000 and$4,665,000, respectively, which expires over the years 2002 through 2021. Inaddition, the Company generated but has not used research and investment taxcredits for federal income tax purposes of approximately $640,000, which willsubstantially expire in the years 2002 through 2006. Under the Internal RevenueCode of 1986, as amended (the “Code”), the Company generally would be entitledto reduce its future Federal income tax liabilities by carrying unused NOL’sforward for a period of 15 years to offset future taxable income earned,and by carrying unused tax credits forward for a period of 15 years tooffset future income taxes.

 

As aresult of the issuances of shares of capital stock of the Company to SpescomLtd. in the past, an ownership change occurred in April 2000. The Company’sability to utilize the consolidated NOL in future years will be limited underthe Code due to this ownership change. The annual limitation is approximately$1,159,000.

 

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

 

Foreign Currency

 

The Company’s geographicmarkets are primarily in the United States and Europe, with limited sales inother parts of the world.  In the ninemonths ended June 30, 2002, revenue from the United States, Europe and otherlocations in the world were 48%, 47% and 5%, respectively.  This compares to 62%, 31% and 7%,respectively for the same period in 2001. The European currencies have been relatively stable against the U.S.dollar for the past several years.  As aresult, foreign currency fluctuations have not had a significant impact on theCompany’s revenues or results of operations. Changes in foreign currency rates, the condition of local economies, andthe general volatility of software markets may result in higher or lowerproportion of foreign revenues in the future. Although the Company’s operating and pricing strategies take into accountchanges in 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 or financialcondition.

 

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Inflation

 

The Company believes thatinflation has not had a material effect on its operations to date.  Although the Company enters into fixed-pricecontracts, management does not believe that inflation will have a materialimpact on its operations for the foreseeable future, as the Company takes intoaccount expected inflation in its contract proposals and is generally able toproject its costs based on forecasted contract requirements.

 

RELATED PARTY TRANSACTIONS

 

In May 1999, the Companycompleted a transaction with Spescom Ltd. (“Spescom”), whereby Spescom acquireda 60% ownership interest in the Company’s former United Kingdom subsidiary,Altris Software Ltd. (“ASL”). In April 2000, the Company sold its remaining 40%ownership in ASL to Spescom. For the nine months ended June 30, 2001 theCompany recognized a gain of $125,000, which it had previously deferred,relating to potential warranty claims arising from the sale of ASL.

 

Inthe first quarter of 2001, the Company acquired certain assets and liabilitiesof Spescom Ltd. U.K. (formerly ASL) along with Spescom Ltd. U.K.’s documentmanagement business. Spescom Ltd. U.K. is a wholly owned subsidiary of Spescom,which became the majority shareholder in the Company in April 2000. Prior tothe acquisition, Spescom Ltd. U.K. had been the Company’s exclusive distributorof the Company’s eB product suite outside North, Latin and South America. Inexchange for the assets and the assumption of certain liabilities of SpescomLtd. U.K., the Company issued 550,000 shares of its common stock to Spescom.The net liabilities assumed of $235,000 were recorded as a charge againstcommon stock.

 

In November 2000 Spescompurchased $530,000 worth of software from the Company. Under a royaltyarrangement, Spescom also resells certain of the Company’s software. For thethree and nine month periods ended June 30, 2002, the Company recognizedroyalty revenue of $0 and $9,000 compared to $30,000 and $38,000 for the threeand nine month periods ended June 30, 2001, arising from this arrangement.

 

Spescom and the Companyhave entered into a license agreement pursuant to which Spescom has licensed tothe Company the right to use the name “Spescom” and to use a trademark owned bySpescom related to certain computer software. The Company will not pay anyroyalties to Spescom in connection with this license. The license is for anindefinite term, but is terminable by either party upon 60 days prior writtennotice. Under the license agreement, Spescom has agreed to indemnify and holdharmless the Company and its directors, officers, employees and agents againstliabilities arising from any claim brought against the Company that allegesthat Spescom’s or the Company’s use of the trademark being licensed infringesthe rights of any third party, provided that the Company is in materialcompliance with the provisions of the license agreement.

 

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Related party liabilitiesconsist of the following:

 
|                                            |   | **June 30,  2002** |       | **September  30,  2001** |       |
|-------------------------------------------------|--------|--------------------|------------|--------------------------|------------|
|                                            |   | **(Unaudited)**    | ** ** |                     | ** ** |
|                                            |   |               |       |                     |       |
| Current  liability:                             |   |               |       |                     |       |
| Notes payable to Spescom Ltd. United Kingdom    |   | $                  | 1,620,000  |                     | $          | — |   |
| Long-term  liabilities:                         |   |               |       |                     |       |
| Loan payable  —Spescom Ltd., South Africa  |   | $                  | 1,276,000  |                     | $          | 1,377,000 |   |
| Loan payable  —Spescom Ltd. United Kingdom |   | 1,955,000          |       | —                   |       |
|                                            |   |               |       |                     |       |
|                                            |   | $                  | 3,231,000  |                     | $          | 1,377,000 |   |

 

At June 30, 2002, theCompany had three demand notes payable for $400,000, $500,000 and $700,000,respectively, each bearing an annual interest rate of 10%. The notes plusaccrued interest are shown in the above table as $1,620,000.   Interest expense on the notes for the ninemonths ended June 30, 2002 was $20,000. The Company continues to rely upon this financing from Spescom for itsoperating needs.

 

Spescom Ltd., SouthAfrica loaned $1,377,000, including accrued interest, to the Company during thefiscal year ended September 30, 2001. As of June 30, 2002 the balance owed onthis loan was $1,276,000. Interest on the outstanding loan amount accrues atthe rate of 10.0% per annum and is payable at maturity on October 15, 2003. Thebalances in the table include accrued interest due.  Interest expense on this loan totaled $67,000 and $4,000 for thenine months ended June 30, 2002 and 2001, respectively.

 

Spescom Ltd. UnitedKingdom loaned $1,955,000, including accrued interest, to the Company duringthe nine months ended June 30, 2002. This loan also bears interest at aninterest rate of 10.0% per annum, payable at maturity, on October 15, 2003.  Interest expense on this loan totaled$172,000 for the nine months ended June 30, 2002.

 

The notes payable arecollateralized by a security interest in favor of both Spescom Ltd. SouthAfrica and Spescom Ltd. United Kingdom in respect of all of the Company’sassets.

 

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PART II.  OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

TheCompany is involved from time to time in litigation arising in the normalcourse of business. Management believes that any liability with respect to suchroutine litigation, individually or in the aggregate, is not likely to bematerial to the Company’s consolidated financial position or results ofoperations.

 

InSeptember 2001, a customer notified the Company that it wishes to cancelits contract with the Company to purchase software and services from theCompany. The Company is currently disputing the terms of the cancellation withthe customer. At June 30, 2002, the Company has deferred costs of $125,000 anddeferred revenue of $360,000 related to this contract. Management does notbelieve that the outcome of this matter will have a material adverse effect onthe Company’s financial position or results of operations.

 

Item 4 – Submission of Matters to a Vote of SecurityHolders

 

None

 

Item 6 – Exhibits and Reports on Form 8-K:

 

3.1*         Registrant’s Articles of Incorporation,as amended.

 

3.2*         Registrant’s Bylaws, as amended.

 

10.27*     Lease Between The Irvine Company and AltrisSoftware, Inc.

 

10.28*              10.0% promissory note due October 15, 2003 inprincipal amount of $1,235,076 issued by Altris Software, Inc. to Spescom Ltd.South Africa on February 15, 2002

 

10.29*              10.0% promissory note due October 15, 2003 inprincipal amount of $1,810,383 issued by Altris Software, Inc. to Spescom Ltd.a United Kingdom corporation on February 15, 2002

 

10.30*              Security agreement between Altris Software, Inc.and Spescom Limited, a United Kingdom corporation and Spescom Limited, aSouth African corporation and collectively with Spescom UK dated February 15, 2002

 

10.31*              10.0% promissory note due upon demand in principalamount of $400,000 issued by Altris Software, Inc. to Spescom Ltd. a UnitedKingdom Corporation on March 15, 2002

 

10.32*              Security agreementdated March 15, 2002 between Altris Software, Inc., a California corporationand Spescom Ltd., a United Kingdom corporation

 

10.33*              Pledge agreement executed March 15, 2002 byand between Altris Software, Inc., a California corporation, Spescom Ltd., anUnited Kingdom corporation and Solomon Ward Seidenwurm & Smith, LLP

 

10.34                     10.0% promissory note due upon demand in principalamount of $500,000 issued by Altris Software, Inc. to Spescom Ltd. a UnitedKingdom Corporation on April 19, 2002

 

10.35                     10.0% promissory note due upon demand in principalamount of $700,000 issued by Altris Software, Inc. to Spescom Ltd. a UnitedKingdom Corporation on May 31, 2002

 

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99.1                           Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of theSarbanes-Oxley Act of 2002

 

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*              Incorporated hereinby this reference from previous filings with the Securities and ExchangeCommission.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | ALTRIS SOFTWARE, INC. |
|--------|-----------------------|
|   |                  |   |
|   |                  |   |
|   | By:                   | /s/ John W. Low |   |
|   |                  |   | John W. Low |
|   |                  |   | Chief Financial Officer |
|   |                  |   |
|   |                  |
|   | Dated:                | August 14, 2002 |   |
|        |                       |  |  |  |  |  |

 

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