**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** |
|------------|-----------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended March31, 2002**

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

 

**Commission File Number 0-15935**

 

| **ALTRIS SOFTWARE INC.**                                |
|---------------------------------------------------------|
| (Exact name of  registrant 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 check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES       ý       NO       o

 

Number of shares of Common Stock outstanding at March 31, 2002:   **30,841,590 **

 

 

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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**

 
|                                                                                         |   | **March 31, 2002** |       | **September  30, 2001** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                         |   |               |       |
|                                                                                         |   | **(Unaudited)**    |       |                    |       |
| **ASSETS**                                                                                   |   |               | ** ** |                    | ** ** |
| Current assets:                                                                              |   |               |       |                    |       |
| Cash and cash equivalents                                                                    |   | $                  | 7,000      |                    | $          | 144,000 |   |
| Receivables, net                                                                             |   | 541,000            |       | 1,150,000               |       |
| Other current assets                                                                         |   | 322,000            |       | 412,000                 |       |
| Total current assets                                                                         |   | 870,000            |       | 1,706,000               |       |
|                                                                                         |   |               |       |                    |       |
| Property and equipment, net                                                                  |   | 262,000            |       | 313,000                 |       |
| Computer software, net                                                                       |   | 1,746,000          |       | 2,164,000               |       |
| Other assets                                                                                 |   | 82,000             |       | 73,000                  |       |
| Total assets                                                                                 |   | $                  | 2,960,000  |                    | $          | 4,256,000 |   |
|                                                                                         |   |               |       |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                                              |   |               | ** ** |                    | ** ** |
|                                                                                         |   |               |       |                    |       |
| Current liabilities:                                                                         |   |               |       |                    |       |
| Accounts payable                                                                             |   | $                  | 1,185,000  |                    | $          | 958,000 |   |
| Accrued liabilities                                                                          |   | 1,396,000          |       | 1,596,000               |       |
| Notes payable and accrued interest to shareholder                                            |   | 400,000            |       | —                  |       |
| Deferred revenue                                                                             |   | 2,016,000          |       | 1,620,000               |       |
| Total current liabilities                                                                    |   | 4,978,000          |       | 4,174,000               |       |
|                                                                                         |   |               |       |                    |       |
| Notes payable and accrued interest to shareholder                                            |   | 3,159,000          |       | 1,377,000               |       |
| Total liabilities                                                                            |   | 8,156,000          |       | 5,551,000               |       |
|                                                                                         |   |               |       |                    |       |
| Shareholders’ deficit:                                                                  |   |               |       |                    |       |
| Common stock, no par value, 40,000,000 shares authorized; 30,841,590  issued and outstanding |   | 73,868,000         |       | 73,838,000              |       |
| Common stock warrants                                                                        |   | 718,000            |       | 718,000                 |       |
| Accumulated other comprehensive loss                                                         |   | —             |       | (33,000                 | )          |
| Accumulated deficit                                                                          |   | (79,782,000        | )          | (75,818,000             | )          |
| Total shareholders’ deficit                                                             |   | (5,196,000         | )          | (1,295,000              | )          |
|                                                                                         |   |               |       |                    |       |
| Total liabilities and shareholders’ deficit                                             |   | $                  | 2,960,000  |                    | $          | 4,256,000 |   |

 

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 March 31,** |       | **For the  six months ended March 31,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------------|------------|----------------------------------------------|--------|
|                                                                |   | **2002**                                    |       | **2001**                                     |   | **2002** |   | **2001** |   |
| Revenues:                                                           |   |                                        |       |                                         |   |   |   |   |   |
| Licenses                                                            |   | $                                           | 329,000    |                                         | $      | 1,487,000 |   | $ | 647,000 |   | $ | 2,868,000 |   |
| Services and other                                                  |   | 1,238,000                                   |       | 1,822,000                                    |   | 2,638,000 |   | 3,342,000 |   |
| Total revenues                                                      |   | 1,567,000                                   |       | 3,309,000                                    |   | 3,285,000 |   | 6,210,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Cost of revenues:                                                   |   |                                        |       |                                         |   |   |   |   |   |
| Licenses                                                            |   | 349,000                                     |       | 457,000                                      |   | 609,000 |   | 795,000 |   |
| Services and other                                                  |   | 879,000                                     |       | 1,108,000                                    |   | 1,862,000 |   | 1,989,000 |   |
| Total cost of revenues                                              |   | 1,228,000                                   |       | 1,565,000                                    |   | 2,471,000 |   | 2,784,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Gross profit                                                        |   | 339,000                                     |       | 1,744,000                                    |   | 814,000 |   | 3,426,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Operating expenses:                                                 |   |                                        |       |                                         |   |   |   |   |   |
| Research and development                                            |   | 569,000                                     |       | 453,000                                      |   | 1,193,000 |   | 939,000 |   |
| Marketing and sales                                                 |   | 1,087,000                                   |       | 1,032,000                                    |   | 2,338,000 |   | 1,896,000 |   |
| General and administrative                                          |   | 677,000                                     |       | 369,000                                      |   | 1,112,000 |   | 711,000 |   |
|                                                                |   | 2,333,000                                   |       | 1,854,000                                    |   | 4,643,000 |   | 3,546,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Loss from operations                                                |   | (1,994,000                                  | )          | (110,000                                     | )      | (3,829,000 | ) | (120,000 | ) |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Interest and other income                                           |   | 2,000                                       |       | 24,000                                       |   | 5,000 |   | 38,000 |   |
| Interest and other expense                                          |   | (85,000                                     | )          | (3,000                                       | )      | (140,000 | ) | (5,000 | ) |
| Gain on sale of interest in subsidiary                              |   | —                                      |       | —                                       |   | — |   | 125,000 |   |
| Net income (loss)                                                   |   | $                                           | (2,077,000 | )                                            | $      | (89,000 | ) | $ | (3,964,000 | ) | $ | 38,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Basic net income (loss) per common share                            |   | $                                           | (0.07      | )                                            | $      | (0.00 | ) | $ | (0.13 | ) | $ | 0.00 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Diluted net income (loss) per common share                          |   | $                                           | (0.07      | )                                            | $      | (0.00 | ) | $ | (0.13 | ) | $ | 0.00 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Shares used in computing basic net income (loss) per common share   |   | 30,842,000                                  |       | 30,841,000                                   |   | 30,842,000 |   | 30,743,000 |   |
|                                                                |   |                                        |       |                                         |   |   |   |   |   |
| Shares used in computing diluted net income (loss) per common share |   | 30,842,000                                  |       | 30,841,000                                   |   | 30,842,000 |   | 31,112,000 |   |

 

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  six months********ended March 31,** |       |
|------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                         |   |                                           |
|                                                                         |   | **2002**                                       |       | **2001** |   |
| Cash flows from operating activities:                                        |   |                                           |       |   |   |
| Net income (loss)                                                            |   | $                                              | (3,964,000 | ) | $ | 38,000 |   |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                                           |       |   |   |
| Depreciation and amortization                                                |   | 547,000                                        |       | 589,000 |   |
| Stock options issued                                                         |   | 30,000                                         |       | — |   |
| Gain on sale of interest in subsidiary                                       |   | —                                         |       | (125,000 | ) |
| Changes in assets and liabilities, net of effect of dispositions:            |   |                                           |       |   |   |
| Receivables, net                                                             |   | 577,000                                        |       | (359,000 | ) |
| Other assets                                                                 |   | 540,000                                        |       | (260,000 | ) |
| Accounts payable                                                             |   | 135,000                                        |       | 323,000 |   |
| Accrued liabilities                                                          |   | (518,000                                       | )          | 67,000 |   |
| Deferred revenue                                                             |   | 409,000                                        |       | (664,000 | ) |
| Net cash used in operating activities                                        |   | (2,244,000                                     | )          | (391,000 | ) |
|                                                                         |   |                                           |       |   |   |
| Cash flows from investing activities:                                        |   |                                           |       |   |   |
| Purchases of property and equipment                                          |   | (30,000                                        | )          | (29,000 | ) |
| Purchases of software                                                        |   | (50,000                                        | )          | — |   |
| Net cash used in investing activities                                        |   | (80,000                                        | )          | (29,000 | ) |
|                                                                         |   |                                           |       |   |   |
| Cash flows from financing activities:                                        |   |                                           |       |   |   |
| Proceeds from shareholder loan                                               |   | 2,182,000                                      |       | — |   |
| Proceeds from exercise of stock options                                      |   | —                                         |       | 3,000 |   |
| Net cash provided by financing activities                                    |   | 2,182,000                                      |       | 3,000 |   |
|                                                                         |   |                                           |       |   |   |
| Effect of exchange rate changes on cash                                      |   | 5,000                                          |       | 12,000 |   |
|                                                                         |   |                                           |       |   |   |
| Net decrease in cash and cash equivalents                                    |   | (137,000                                       | )          | (405,000 | ) |
| Cash and cash equivalents at beginning of period                             |   | 144,000                                        |       | 1,808,000 |   |
|                                                                         |   |                                           |       |   |   |
| Cash and cash equivalents at end of period                                   |   | $                                              | 7,000      |   | $ | 1,403,000 |   |

 

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

 

5

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ALTRIS SOFTWARE, INC.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS

(Unaudited)

 

Note 1 - Basis of Presentation

 

The consolidated financialstatements include the accounts of Altris Software, Inc. and its whollyowned subsidiaries (the “Company”). All significant intercompany balances andtransactions have been eliminated. In the first quarter of fiscal 2001, theCompany acquired certain assets and liabilities of Spescom Ltd. U.K.(formerly Altris Software Limited) along with Spescom Ltd. U.K.’s documentmanagement business. Spescom Ltd. UK is a wholly owned subsidiary ofSpescom Ltd., which became the majority shareholder in the Company inApril 2000. (See Note 3.)

 

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 Report on Form 10-K for the year endedSeptember 30, 2001.  It should beunderstood that the accounting measurements at an interim date inherentlyinvolve 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.

 

The accompanying consolidated statements of operationsand cash flows for the three and six months ended March 31, 2002 and 2001 areunaudited. The consolidated financial statements and related notes have beenprepared in accordance with generally accepted accounting principles applicableto interim periods.  In the opinion ofmanagement, the consolidated financial statements reflect all adjustments,consisting only of normal recurring adjustments, necessary for a fairpresentation of the consolidated financial position, operating results and cashflows for the periods presented.

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with a wide-ranging set ofstandards and interpretations of those standards under accounting principlesgenerally accepted in the United States of America, consisting principally of:

 

-    Statement of Position (SOP) No. 97-2, “SoftwareRevenue Recognition,”

        issued by the American Institute ofCertified Public Accountants (AICPA)

 

-    AICPA SOP No. 98-9, “Modification of SOP 97-2,Software Revenue

        Recognition, With Respect to CertainTransactions,”

 

-    Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial

        Statements,” issued by the United StatesSecurities and Exchange

        Commission

 

The Company enters into contractual arrangements with end users of itsproducts that may include software licenses, maintenance services, consultingservices, or various combinations thereof, including the sale of such elementsseparately. For each arrangement, revenues are recognized when both partieshave signed an agreement, the fees to be paid by the customer are fixed ordeterminable, collection of the fees is probable, delivery of the product hasoccurred and no other significant obligations on the part of the Companyremain.

 

For multiple-element arrangements, each element of the arrangement isanalyzed and the Company allocates a portion of the total fee under thearrangement to the elements based on the fair value of the element, regardlessof any separate prices stated within the contract for each element. Fair valueis generally considered the price a customer would be required to pay if theelement were to be sold separately. The Company applies the “residual method”as allowed under SOP 98-9 in accounting for any element of an arrangement thatremains undelivered.

 

6

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License Revenues: Amounts allocated to software license revenues arerecognized at the time of shipment of the software when fair value for anyundelivered elements is determinable and all the other revenue recognitioncriteria discussed above have been met.

 

Consulting Service Revenues: Consulting service revenues are comprisedof consulting and implementation services and, to a limited extent, training.Consulting services are generally sold on a time-and-materials or fixed feebasis and can include services ranging from software installation to dataconversion to allow the software to operate in customized environments.Services are generally separable from the other elements under the same arrangementsince the performance of the services are not essential to the functionality ofthe other elements of the transaction and are described in the contract suchthat the total price of the arrangement would be expected to vary as the resultof the inclusion or exclusion of the services. Revenues for these services aswell as training are generally recognized as the services are performed fortime and materials contracts. Contractrevenues for fixed fee contracts or programs requiring specialized systems arerecognized using the percentage-of-completion method of accounting, primarilybased on contract labor hours incurred to date compared with total estimatedlabor hours at completion. Provisions for anticipated contract losses arerecognized at the time they become known.

 

Maintenance Service Revenues: Maintenance service revenues consistprimarily of fees for providing nspecified software upgrades on awhen-and-if-available basis and technical support over a specified term, whichis typically twelve months. Maintenance revenues are typically paid in advanceand are recognized on a straight-line basis over the term of the contract.

 

Revenues on sales made by the Company’s resellers are generallyrecognized upon shipment of the Company’s software to the reseller, when thereseller has an identified end user and all other revenue recognition criterianoted above are met. Under limited arrangements with certain distributors, allthe revenue recognition criteria have been met upon delivery of the product tothe distributor and, accordingly, revenues are recognized at that time. TheCompany does not offer a right of return on its products.

 

Foreign CurrencyTranslation

 

The financial statements of the foreign subsidiary were prepared in itslocal currency and translated into U.S. dollars based on the current exchangerate at the end of the period for the balance sheet and a weighted-average ratefor the period on the statement of operations. Accumulated translationadjustments of $0 and $(33,000) are recorded at March 31, 2002 and September30, 2001, respectively. Accumulated translation adjustments are reflected asaccumulated other comprehensive loss in Shareholders’ Deficit and accordinglyhave no effect on net income. Foreign currency transaction gains and losses areincluded in net loss.

 

Note 2 — Statement of Cash Flows

 

For the six months ended March 31, 2001, the following assets andliabilities, attributable to the acquisition of Spescom UK, have been excludedfrom the cash flow statement (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 | )      |

 

The following is additional cash flow information for the six monthsended March 31:

 
|                                      |   | **2002** |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
| Supplemental cash flow information:       |   |     |   |     |   |
| Interest paid                             |   | $        | 4,000  |     | $      | 3,000 |   |
|                                      |   |     |   |     |   |
| Schedule of noncash financing activities: |   |     |   |     |   |
| Stock Options Granted to Consultant       |   | $        | 30,000 |     | $      | — |   |

 

7

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Note 3 — Spescom Transaction and Related Parties

 

In May 1999, the Company completed a transaction withSpescom Ltd. (“Spescom”), whereby Spescom acquired a 60% ownership interest inthe 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 six months ended March 31, 2001 the Company recognized a gain of$125,000, which it had previously deferred relating to potential warrantyclaims arising from the sale of ASL.

 

In the firstquarter of 2001, the Company acquired certain assets and liabilities of SpescomLtd. U.K. (formerly ASL) along with Spescom Ltd. U.K.’s document managementbusiness. Spescom Ltd. UK is a wholly owned subsidiary of Spescom, which becamethe majority shareholder in the Company in April 2000. Prior to theacquisition, Spescom Ltd. UK had been the Company’s exclusive distributor ofthe Company’s eB product suite outside North, Latin and South America. Inexchange for the assets and the assumption of certain liabilities of SpescomLtd. UK, the Company issued 550,000 shares of its common stock to Spescom. Thenet liabilities assumed of $235,000 were recorded as a charge against commonstock.

 

In November 2000 Spescom purchased $530,000 worth ofsoftware from the Company. Under a royalty arrangement, Spescom also resellscertain of the Company’s software. For the three and six month periods endedMarch 31, 2002, the Company recognized royalty revenue of $2,000 and $14,000compared to $30,000 and $38,000 for the three and six month periods ended March31, 2001, arising from this arrangement. The Company purchased $46,000 ofconsulting services from Spescom during the six months ended March 31, 2001.

 

Spescom and the Company have entered into a licenseagreement pursuant to which Spescom has licensed to the Company the right touse the name “Spescom” and to use a trademark owned by Spescom related tocertain computer software. The Company will not pay any royalties to Spescom inconnection with this license. The license is for an indefinite term, but isterminable by either party upon 60 days prior written notice. Under the licenseagreement, Spescom has agreed to indemnify and hold harmless the Company andits directors, officers, employees and agents against liabilities arising fromany claim brought against the Company that alleges that Spescom’s or theCompany’s use of the trademark being licensed infringes the rights of any thirdparty, provided that the Company is in material compliance with the provisionsof the license agreement.  The Companybelieves that the terms of this license agreement with Spescom are at least asfavorable to the Company as it could have obtained in an arms’ lengthtransaction from an unrelated third party.

 

Related party liabilities consist of the following:

 
|                                                              |   | **March 31,   2002** |      | **September 30,   2001** |      |
|-------------------------------------------------------------------|--------|----------------------|-----------|--------------------------|-----------|
|                                                              |   |                 |      |
|                                                              |   | **(Unaudited)**      |      |                     |      |
| Current  liability:                                               |   |                 |      |                     |      |
| Notes payable and accrued interest to Spescom Ltd. United Kingdom |   | $                    | 400,000   |                     | —    |   |
|                                                              |   |                 |      |                     |      |
| Loan  payable—Spescom Ltd., South Africa                     |   | 1,261,000            |      | $                        | 1,377,000 |   |
| Loan  payable—Spescom Ltd. United Kingdom                    |   | 1,898,000            |      | —                   |      |
|                                                              |   |                 |      |                     |      |
|                                                              |   | $                    | 3,559,000 |                     | $         | 1,377,000 |   |

 

8

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Spescom Ltd., South Africa advanced $1,377,000 to theCompany during the fiscal year ended September 30, 2001. As of March 31, 2002the balance owed on this loan is $1,261,000. Interest on the outstanding loadamount accrues at the rate of 10.0% per annum and is payable at maturity onOctober 15, 2003. The balances in the table also include accrued interest due.

 

Spescom Ltd. United Kingdom advanced to the Company$1,898,000, including accrued interest during the six months ending March 31,2002. This loan also bears interest at an interest rate of 10.0% per annum,payable at maturity, on October 15, 2003.

 

At March 31, 2002, the Company had a $400,000 notepayable to Spescom Ltd. United Kingdom payable on demand and bearing an annualinterest rate of 10%. The $400,000 is part of a $1,600,000 commitment forworking capital requirements agreed to by Spescom. In April 2002, the Companyreceived an additional $500,000 as part of this loan. The remaining $700,000 ofthe $1.6 million in funding is anticipated to be received during the quarterended June 30, 2002. The Company continues to rely upon this financing fromSpescom for its operating needs.

 

The loans are secured by a security interest in favorof both Spescom Ltd. South Africa and Spescom Ltd. United Kingdom in respect ofall of the Company's assets as security. The Company believes that the terms ofthese loans from Spescom are at least as favorable to the Company as it couldhave obtained in an arms' length transaction from an unrelated third party.

 

Note 4 — Receivables

 

Receivables consist of the following:

 
|                                 |   | **March 31,****2002** |    | **September 30,   2001** |   |
|--------------------------------------|--------|-----------------------|---------|--------------------------|--------|
|                                 |   |                  |    |
|                                 |   | **(Unaudited)**       |    |                     |   |
| Billed receivables                   |   | $                     | 629,000 |                     | $      | 1,240,000 |   |
| Less allowance for doubtful accounts |   | (88,000               | )       | (90,000                  | )      |
|                                 |   | $                     | 541,000 |                     | $      | 1,150,000 |   |

 

9

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

 

Basic net income (loss) per common share is computedas net income (loss) divided by the weighted average number of common sharesoutstanding during the period.  Dilutednet income (loss) per common share is computed as net income (loss) divided bythe weighted average number of common shares and potential common shares, usingthe treasury stock method, outstanding during the period and assumes conversioninto common stock at the beginning of each period of all outstanding shares ofconvertible preferred stock. 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 March 31,** |       | **For the  six months   ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|-------------------------------------------|--------|
|                                                                                                     |   | **2002**                                    |       | **2001**                                  |   | **2002** |   | **2001** |   |
| Net income (loss) used in computing basic and diluted net income  (loss) per share                       |   | $                                           | (2,077,000 | )                                         | $      | (87,000 | ) | $ | (3,964,000 | ) | $ | 38,000 |   |
|                                                                                                     |   |                                        |       |                                      |   |   |   |   |   |
| Shares Used:                                                                                             |   |                                        |       |                                      |   |   |   |   |   |
|                                                                                                     |   |                                        |       |                                      |   |   |   |   |   |
| Weighted average common shares outstanding used in computing basic  net income (loss) per common share   |   | 30,842,000                                  |       | 30,841,000                                |   | 30,842,000 |   | 30,743,000 |   |
|                                                                                                     |   |                                        |       |                                      |   |   |   |   |   |
| Weighted average common shares outstanding used in computing diluted  net income (loss) per common share |   | 30,842,000                                  |       | 30,841,000                                |   | 30,842,000 |   | 31,112,000 |   |
|                                                                                                          |        |                                             |            |                                           |        |  |  |  |  |  |  |  |  |

 

Based on the above table, the basic and dilutedearnings per share is actually $0.0012for the six months ended March 31, 2001.For financial statement presentation purposes we have rounded the basic anddiluted earnings per share to $0.00.

 

Potentially dilutive stock options to purchase up to137,379 and 373,358 shares of the Company’s common stock, with weighted averageprices of $0.53 and $1.11 were outstanding at March 31, 2002 and 2001,respectively. Warrants to purchase 400,000 shares of the Company’s stock at anaverage exercise price of $1.90 per share were outstanding at both March 31,2002 and 2001. These options and warrants were not included in the computationof diluted loss per common share for the three month period ended March 31,2002 and 2001 because their effect was antidulitive. Dilutive options andwarrants were not included in the computation of the diluted loss per commonshare for the six month period ended March 31, 2002 because their effect wasantidilutive. Dilutive stock options and warrants totaling 369,000 wereincluded in the calculation of diluted earnings per share for the six monthperiod ended March 31, 2001.

 

10

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Note 6 — Segment and Geographic Information

 

The Company has one business segment which consists ofthe development and sale of a suite of client/server document managementsoftware products.

 

Revenues for the three and six month periods ended March 31, 2002 and2001 by customer location are as follows:

 
|                             |   | **For the three months ended   March 31,** |      | **For the six months ended   March 31,** |   |
|----------------------------------|--------|--------------------------------------------|-----------|------------------------------------------|--------|
|                             |   | **2002**                                   |      | **2001**                                 |   | **2002** |   | **2001** |   |
| United States                    |   | $                                          | 875,000   |                                     | $      | 2,077,000 |   | $ | 1,708,000 |   | $ | 3,422,000 |   |
| Europe, primarily United Kingdom |   | 564,000                                    |      | 1,175,000                                |   | 1,406,000 |   | 2,128,000 |   |
| Other International              |   | 128,000                                    |      | 57,000                                   |   | 171,000 |   | 660,000 |   |
|                             |   | $                                          | 1,567,000 |                                     | $      | 3,309,000 |   | $ | 3,285,000 |   | $ | 6,210,000 |   |

 

Note 7- Recent Accounting Pronouncements

 

In July 2001,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations” (Statement141) which supersedes APB Opinion No. 16, “Business Combinations” and SFASNo. 38, “Accounting for Preacquisition Contingencies of PurchasedEnterprises.” Statement 141 addresses financial accounting and reporting for businesscombinations and requires that all business combinations within the scope ofStatement 141 be accounted for using only the purchase method. Statement 141 isrequired to be adopted for all business combinations initiated afterJune 30, 2001. The adoption of Statement 141 has not had a material effecton the financial statements.

 

Also inJuly 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, the FASB issued Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations,” (“SFAS No. 143”). SFAS No. 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. It applies to all entitiesand legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and/or normal operationof a long-lived assets, except for certain obligations of lessees. SFAS No. 143amends FASB Statement No. 19, “Financial Accounting and Reporting by Oil andGas Producing Companies,” and is effective for fiscal years beginning afterApril 1, 2003. Management believes that theadoption of Statement 143 will not have a material effect on the Company’sfinancial statements.

 

During August 2001, the FASB issued Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” (“SFAS No. 144”). SFAS No. 144 addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of,” and theaccounting and reporting provision of APB Opinion No. 30, “Reporting theResults of Operations - 

 

11

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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 statement impactof adoption of SFAS No. 144.

 

Note 8— Comprehensive Income

 
|                                          |   | **Three  Months Ended   March 31,** |       | **Six Months  Ended   March 31,** |   |
|-----------------------------------------------|--------|-------------------------------------|------------|-----------------------------------|--------|
|                                          |   | **2002**                            |       | **2001**                          |   | **2002** |   | **2001** |   |
| Net income (loss)                             |   | $                                   | (2,077,000 | )                                 | $      | (89,000 | ) | $ | (3,964,000 | ) | $ | 38,000 |   |
| Other comprehensive income (loss):            |   |                                |       |                              |   |   |   |   |   |
| Foreign currency translation gain adjustments |   | 20,000                              |       | 6,000                             |   | 33,000 |   | 7,000 |   |
| Other comprehensive income                    |   | 20,000                              |       | 6,000                             |   | 33,000 |   | 7,000 |   |
| Comprehensive income (loss)                   |   | $                                   | (2,057,000 | )                                 | $      | (83,000 | ) | $ | (3,931,000 | ) | $ | 45,000 |   |

 

12

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MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OFOPERATIONS

 

THREE AND SIX MONTH PERIODS ENDED MARCH 31, 2002COMPARED WITH THREE AND SIX MONTH PERIODS ENDED MARCH 31, 2001.

 

This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange 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.

 

CRITICAL ACCOUNTING POLICIES

 

The consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America. Assuch, management is required to make judgments, estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. The significant accounting policies whichare most critical to aid in fully understanding and evaluating reportedfinancial results include the following:

 

Revenue Recognition

 

The Company enters into contractual arrangements with end users thatmay include licensing of the Company’s software products, product support andmaintenance services, consulting services or various combinations thereof,including the sale of such products or services separately. The Company’saccounting policies regarding the recognition of revenue for these contractualarrangements is fully described in Note 1 of Notes to Consolidated FinancialStatements.

 

The Company considers many factors when applying accounting principlesgenerally accepted in the United States of America related to revenuerecognition. These factors include, but are not limited to:

 

- The actual contractual terms, such as paymentterms, delivery dates, and

   pricing of the various product and serviceelements of a contract

 

- Availability of products to be delivered

 

- Time period over which services are to beperformed

 

- Creditworthiness of the customer

 

- The complexity of customizations to theCompany’s software required by

   service contracts

 

- The sales channel through which the sale ismade (direct, VAR,

   distributor, etc.)

 

- Discounts given for each element of a contract

 

- Any commitments made as to installation orimplementation “go live”

   dates

 

13

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Each of the relevant factors is analyzed to determine its impact,individually and collectively with other factors, on the revenue to berecognized for any particular contract with a customer. Management is requiredto make judgments regarding the significance of each factor in applying therevenue recognition standards, as well as whether or not each factor complieswith such standards. Any misjudgment or error by management in its evaluationof the factors and the application of the standards, especially with respect tocomplex or new types of transactions, could have a material adverse affect onthe Company’s future operating results.

 

Allowance for Doubtful Accounts

 

The Company sells its products directly to end users, generallyrequiring a significant up-front payment and remaining terms appropriate forthe creditworthiness of the customer. The Company also sells its products toVARs and other software distributors generally under terms appropriate for thecreditworthiness of the VAR or distributor. The Company believes no significantconcentrations of credit risk existed at March 31, 2002. Receivables fromcustomers are generally unsecured. The Company continuously monitors itscustomer account balances and actively pursues collections on past duebalances. The Company maintains an allowance for doubtful accounts whichis  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 development costs incurred subsequent to the determination oftechnological feasibility and marketability of a software product arecapitalized. Amortization of capitalized software development costs commenceswhen the products are available for general release. Amortization is determinedon a product by product basis using the greater of a ratio of current productrevenues to projected current and future product revenues or an amountcalculated using the straight-line method over the estimated economic life ofthe product, generally three to five years. In addition to in-house softwaredevelopment costs, the Company purchases certain software from third-partysoftware providers and capitalizes such costs in software development costs.The Company continually evaluates the recoverability of its capitalizedsoftware development costs and considers any events or changes in circumstancesthat would indicate that the carrying amount of an asset may not berecoverable. Any material changes in circumstances, such as a large decrease inrevenues or the discontinuation of a particular product line could requirefuture write-downs in the Company’s capitalized software development costs andcould have a material adverse impact on our operating results for the periodsin which such write-downs occur.

 

RESULTS OF OPERATIONS

 

Revenues

 

Revenues for the three and six month periods endedMarch 31, 2002 were $1,567,000 and $3,285,000 as compared to $3,309,000 and$6,210,000 for the three and six month periods ended March 31, 2001.

 

For the three months ended March 31, 2002 revenuesconsisted of $329,000 (21%) in software licenses and $1,238,000 (79%) relatedto services and other revenue. This compares to software license revenues of$1,487,000 (45%) and services and other revenue of $1,822,000 (55%) for thethree months ended March 31, 2001. For the six months ended March 31, 2002revenues consisted of $647,000 (20%) in software license revenues and$2,638,000 (80%) in services and other revenue. This compares to softwarelicense revenues of $2,868,000 (46%) and services and other revenue of $3,342,000(54%) for the six months ended March 31, 2001. License revenue for the sixmonths ended March 31, 2001 included a license to Spescom of $530,000.

 

Software license revenues decreased $1,158,000 and$2,221,000 for the three and six month periods ended March 31, 2002 compared tothe three and six month periods ended March 31, 2001. The decrease is due tolower sales of the eB product, which management believes is a result ofcustomers deferring capital expenditures due to an economic slowdown in the UnitedStates caused by the recent September 11th terrorist attacks.

 

14

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Revenues generated from services decreased $584,000and $704,000 for the three and six month periods ended March 31, 2002 over thethree and six month periods ended March 31, 2001. Management attributes thisdecline to the decline in software sales service fees for implementing the eBproduct.

 

A small number of customers has typically accountedfor a large percentage of the Company’s annual revenue. One customer accountedfor 17% of total revenue for the six months ended March 31, 2002 and no onecustomer accounted for more than 10% of revenue for the six month period endedMarch 31, 2001.  One consequence of thisdependence has been that revenue can fluctuate significantly on a quarterlybasis.  The Company’s reliance onrelatively few customers could have a material adverse effect on the results ofits operations on a quarterly basis. Additionally, a significant portion of the Company’s revenues hashistorically been derived from the sale of systems to new customers.

 

Cost of Revenues

 

Gross profit consists of gross profit from licensesand gross profit from services and other. Gross profit as a percentage ofrevenue was 22% and 25% for the three and six month periods ended March 31,2002 compared to gross profit percentages of 53% and 55% for the three and sixmonth periods ended March 31, 2001. The decrease in gross profit for the threeand six month periods ended March 31, 2002 was due to the amortization ofsoftware costs over lower software license revenues.

 

Cost of license revenues consists of costs associatedwith reselling third-party software products and amortization of internalsoftware development costs. Gross profit from license revenues as a percentageof license revenues was (6%) and 6% for the three and six month periods endedMarch 31, 2002 compared to 69% and 72% for the three and six months ended March31, 2001.   The decrease to (6%) from69% and to 6% from 72% was the result of a decrease in sales of eB software. Assales decline, our fixed costs remain constant and result in a lower grossprofit on licenses sold.

 

Cost of services and other revenues consists primarilyof personnel-related costs in providing consulting services, training tocustomers and support. It also includes costs associated with resellingthird-party hardware and maintenance. Gross profit from services and other revenue as a percentage of servicesand other revenue was 29% for the three and six month periods ended March 31,2002 compared to 39% and 40% for the three and six month periods ended March31, 2001.  The decrease in the grossprofit margin from services and other revenue for the three and six monthperiods ended March 31, 2002 was due principally to the decline in servicerevenue for the periods while personnel-related costs remained constant.  In response to the lower service revenues,in March of 2002 the Company reduced the number of service personnel and theirassociated costs in an effort to bring personnel related costs of services morein line with the lower revenues currently being achieved.

 

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.

 

Operating Expenses

 

Research and development expense for the three and sixmonth periods ended March 31, 2002 was $569,000 and $1,193,000 as compared to$453,000 and $939,000 for the three and six month periods ended March 31, 2001.The increases in research and development for the three and six month periodsended March 31, 2002 was primarily due to increases in personnel and associatedcosts as a result of assigning personnel to 

 

15

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development activities whereas they were previously assigned tosoftware implementation, sales and marketing activities in the prior year.  In March of 2002 in response to the decreasein revenues, the Company reduced the number of research and developmentpersonnel in an effort to lower future expenditures.  The reductions were implemented with a view to retaining theCompany’s core technological competencies and maintaining its abilities tocontinue to enhance its eB product suite.  As a result of these changes research and development expense isexpected to decline in future quarters.

 

Marketing and sales expense for the three and sixmonth periods was $1,087,000 and $2,338,000 as compared to $1,032,000 and$1,896,000 for the three and six month periods ended March 31, 2001. Marketingand sales activity for the three month period ended March 31, 2002 remainedunchanged, compared to the same period ended March 31, 2001. Towards the end offiscal year 2001 the Company expanded its sales and marketing capabilities inanticipation of an upturn in the economy. The expansion led to increased expense for additional personnel andassociated costs in the first six months of fiscal year 2002 as compared to thesame period a year ago.  However, withthe continued downturn in the economy and the decrease in revenues, in March2002 the Company reduced its sales and marketing personnel and associated costsalong with certain marketing expenditures in an effort to achieve a reducedlevel of sales and marketing expenditures which will be more in line withrevenues in future quarters.

 

General and administrative expense was $677,000 and$1,112,000 for the three and six month periods ended March 31, 2002 as comparedto $369,000 and $711,000 for the three and six month periods ended March 31,2001. Of the increase in general and administrative expense $277,000 resultedfrom 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. As a result of thereduction in administrative personnel in March of 2002, general andadministrative expenses are expected to decline slightly in remaining quartersof fiscal 2002.

 

Interest and other income was $2,000 and $5,000 forthe three and six month periods ended March 31, 2002 as compared to $24,000 and$38,000 for the three and six month periods ended March 31, 2001. The decreaseis primarily due to a decrease in investments in 2002 as compared to 2001.

 

Interest and other expense was $85,000 and $140,000for the three and six month periods ended March 31, 2002 as compared to $3,000and $5,000 for the three and six month periods ended March 31, 2001.  The increase was due to additional interestexpense on the Company’s higher debt balances during 2002 as compared to 2001.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2002, the Company’s cash and cashequivalents totaled $7,000 as compared to $1,444,000 at September 30, 2001, andits current ratio was .2 to 1. For the six month period ended March 31, 2002,cash used in operating and investing activities totaled $2,324,000, while cashprovided by financing activities totaled $2,182,000.

 

The Company has received loans from Spescom in thepast to meet its obligations. The outstanding balance of its loans from Spescomincreased from $1,377,000 on September 30, 2001 to $3,559,000 on March 31,2002. Such loans are secured by all of the assets of the Company. See “RelatedParty Transactions” below.

 

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Included in the loan balance of $3,559,000 owing toSpescom at the end of March 2002 is $400,000 Spescom provided in workingcapital in the form of a demand loan. The $400,000 is part of a $1,600,000commitment for working capital requirements agreed to by Spescom. In April2002, the Company received an additional $500,000 as part of this loan. Theremaining $700,000 of the $1.6 million in funding is anticipated to be receivedduring the quarter ended June 30, 2002. The funding to date has enabled theCompany to restructure its operation and meet its obligations. In addition, ourstrategic restructuring plan enables the company to reduce our costs to a levelthat is aimed at achieving a breakeven cash flow by our fiscal year-end, whilestill maintaining our core competencies. The loan bears an annual interestrate of 10% and is payable on demand.  As part of the loan, the Companyhas granted a security interest in favor of Spescom in respect of all of theCompany’s assets.

 

Although the Company in the past has received fundingfrom Spescom for working capital purposes including the $900,000 of the $1.6million funding commitment, Spescom is not obligated to provide additionalloans. Spescom's ability to provide future funding has been adversely affectedover the past months by the general decline in economic conditions and asubstantial decline in the value of the South African Rand in relation to othercurrencies. In addition, if Spescom is otherwise able and willing to provideadditional loans on terms acceptable to the Company, the funding of such loansmay be delayed or prevented by currency exchange regulations of the Republic ofSouth Africa under which Spescom is required to apply for and obtain theapproval of the South African Reserve Bank before providing any funds to theCompany. Moreover, the terms on which any additional funding is provided arenot specified and may include interest rates, security arrangements oradditional equity dilution that are not acceptable to the Company or that couldbe materially adverse to the Company.

 

In March 2002, the Company implemented substantialreductions in costs in an effort to achieve a break-even level of cash flow inthe near term. Management believes that the additional $1,600,000 loan fromSpescom and these cost reductions will enable the Company to achieve abreak-even level of cash flow by the end of the fiscal year. Although suchreductions have reduced the Company’s research and development, marketing andsales capabilities, management believes that the reduced levels of research anddevelopment, marketing and sales costs are consistent with the level ofrevenues currently being achieved. Moreover, the Company believes suchreductions were implemented with a view to maximizing the Company’s ability tocontinue to maintain and support its eB product suite, while at the same timepursuing opportunities for sales of new eB systems to new customers. There canbe no assurance, however, that the Company will receive the remaining $700,000in funding agreed by Spescom or will be able to continue to obtain sufficientorders or to achieve sufficient cost reductions to enable the Company to reacha cash flow break-even level, which would be necessary to continue operationsin the absence of further financing.

 

Net Operating Loss Tax Carryforwards

 

As ofSeptember 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 NOLforward 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 a result of theissuances of shares of capital stock of the Company to Spescom Ltd. in thepast, an ownership change occurred in April 2000. The Company’s ability toutilize the consolidated NOL in future years will be limited under the Code dueto this ownership change. The annual limitation is approximately $1,159,000.

 

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

 

Foreign Currency

 

The Company’s geographic markets are primarily in theUnited States and Europe, with sales in other parts of the world.  In the six months ended March 31, 2002,revenue from the United States, Europe and other locations in the world were52%, 43% and 5%, respectively.  Thiscompares to 55%, 34% and 11%, respectively for the same period in 2001.  The European currencies have been relativelystable against the U.S. dollar for the past several years.  As a result, foreign currency fluctuationshave not had a significant impact on the Company’s revenues or results ofoperations.  Changes in foreign currencyrates, the condition of local economies, and the general volatility of softwaremarkets may result in higher or lower proportion of foreign revenues in thefuture.  Although the Company’soperating and pricing strategies take into account changes in exchange ratesover time, there can be no assurance that future fluctuations in the value offoreign currencies will not have a material adverse effect on the Company’sbusiness, operating results and financial condition.

 

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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

 

In May 1999, the Company completed a transaction withSpescom Ltd. (“Spescom”), whereby Spescom acquired a 60% ownership interest inthe 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 six months ended March 31, 2001 the Company recognized a gain of$125,000, which it had previously deferred relating to potential warrantyclaims arising from the sale of ASL.

 

In the firstquarter of 2001, the Company acquired certain assets and liabilities of SpescomLtd. U.K. (formerly ASL) along with Spescom Ltd. U.K.’s document managementbusiness. Spescom Ltd. UK is a wholly owned subsidiary of Spescom, which becamethe majority shareholder in the Company in April 2000. Prior to theacquisition, Spescom Ltd. UK had been the Company’s exclusive distributor ofthe Company’s eB product suite outside North, Latin and South America. Inexchange for the assets and the assumption of certain liabilities of SpescomLtd. UK, the Company issued 550,000 shares of its common stock to Spescom. Thenet liabilities assumed of $235,000 were recorded as a charge against commonstock.

 

In November 2000 Spescom purchased $530,000 worth ofsoftware from the Company. Under a royalty arrangement, Spescom also resellscertain of the Company’s software. For the three and six month periods endedMarch 31, 2002, the Company recognized royalty revenue of $2,000 and $14,000compared to $30,000 and $38,000 for the three and six month periods ended March31, 2001, arising from this arrangement. The Company purchased $46,000 ofconsulting services from Spescom during the six months ended March 31, 2001.

 

Spescom and the Company have entered into a licenseagreement pursuant to which Spescom has licensed to the Company the right touse the name “Spescom” and to use a trademark owned by Spescom related tocertain computer software. The Company will not pay any royalties to Spescom inconnection with this license. The license is for an indefinite term, but isterminable by either party upon 60 days prior written notice. Under the licenseagreement, Spescom has agreed to indemnify and hold harmless the Company andits directors, officers, employees and agents against liabilities arising fromany claim brought against the Company that alleges that Spescom’s or theCompany’s use of the trademark being licensed infringes the rights of any thirdparty, provided that the Company is in material compliance with the provisionsof the license agreement.  The Companybelieves that the terms of this license agreement with Spescom are at least asfavorable to the Company as it could have obtained in an arms’ lengthtransaction from an unrelated third party.

 

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Related party liabilities consist of the following:

 
|                                                              |   | **March 31,   2002** |      | **September 30,   2001** |      |
|-------------------------------------------------------------------|--------|----------------------|-----------|--------------------------|-----------|
|                                                              |   | **(Unaudited)**      |      |                     |      |
| Current  liability:                                               |   |                 |      |                     |      |
| Notes payable and accrued interest to Spescom Ltd. United Kingdom |   | $                    | 400,000   |                     | —    |   |
|                                                              |   |                 |      |                     |      |
| Loan  payable—Spescom Ltd., South Africa                     |   | 1,261,000            |      | $                        | 1,377,000 |   |
| Loan  payable—Spescom Ltd. United Kingdom                    |   | 1,898,000            |      | —                   |      |
|                                                              |   |                 |      |                     |      |
|                                                              |   | $                    | 3,559,000 |                     | $         | 1,377,000 |   |

 

Spescom Ltd., South Africa advanced $1,377,000 to theCompany during the fiscal year ended September 30, 2001. As of March 31, 2002the balance owed on this loan is $1,261,000. Interest on the outstanding loanamount accrues at the rate of 10.0% per annum and is payable at maturity onOctober 15, 2003. The balances in the table also include accrued interest due.

 

Spescom Ltd. United Kingdom advanced to the Company$1,898,000, including accrued interest during the six months ending March 31,2002. This loan also bears interest at an interest rate of 10.0% per annum,payable at maturity, on October 15, 2003.

 

At March 31, 2002, the Company had a $400,000 notepayable to Spescom Ltd. United Kingdom payable on demand and bearing an annualinterest rate of 10%. The $400,000 is part of a $1,600,000 commitment forworking capital requirements agreed to by Spescom. In April 2002, the Companyreceived an additional $500,000 as part of this loan. The remaining $700,000 ofthe $1.6 million in funding is anticipated to be received during the quarterended June 30, 2002. The Company continued to rely upon this financing fromSpescom for its operating needs.

 

The loans are secured by a security interest in favorof both Spescom Ltd. South Africa and Spescom Ltd. United Kingdom in respect ofall of the Company's assets as security. The Company believes that the terms ofthese loans from Spescom are at least as favorable to the Company as it couldhave obtained in an arms' length transaction from an unrelated third party.

 

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PART II.  OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

The Company is involved from timeto time in litigation arising in the normal course of business. Managementbelieves 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.

 

In September 2001, acustomer notified the Company that it wishes to cancel its contract with theCompany to purchase software and services from the Company. The Company iscurrently disputing the terms of the cancellation with the customer. AtMarch 31, 2002, the Company has deferred costs of $125,000 and deferredrevenue of $360,000 related to this contract. Management does not believe thatthe outcome of this matter will have a material adverse effect on the Company’sfinancial 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:

 

10.28                     10.0% promissory note due October15, 2003 in principal amount of $1,235,076 issued by Altris Software, Inc. toSpescom Ltd. South Africa on February 15, 2002

 

10.29                     10.0% promissory note due October15, 2003 in principal amount of $1,810,383 issued by Altris Software, Inc. toSpescom Ltd. a United Kingdom corporation on February 15, 2002

 

10.30                     Security agreement between AltrisSoftware, Inc. and SpescomLimited, a United Kingdom corporation and Spescom Limited, a South Africancorporation and collectively with Spescom UKdated February 15, 2002

 

10.31                     10.0% promissory note due upondemand in principal amount of $400,000 issued by Altris Software, Inc. toSpescom Ltd. a United Kingdom Corporation on March 15, 2002

 

10.32                     Security agreement dated March 15, 2002 between AltrisSoftware, Inc., a California corporation and Spescom Ltd., a United Kingdomcorporation

 

10.33                     Pledge agreement executedMarch 15, 2002 by and between Altris Software, Inc., a California corporation,Spescom Ltd., an United Kingdom corporation and Solomon Ward Seidenwurm &Smith, LLP

 

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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.

 

 
|   | ALTRIS SOFTWARE, INC. |                                        |
|--------|-----------------------|---------------------------------------------|
|   |                  |
|   | By:                   | /s/John W. Low                              |
|   |                  |     John W.  Low             |
|   |                  |     Chief  Financial Officer |
|   |                  |                                        |
|   |                  |
|   | Dated:                |                                        | May 15, 2002 |
|        |                       |                                             |  |  |  |

 

21

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