** **

**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C.  20549**

 

 

**FORM 10-Q**

 

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGEACT OF 1934**

 

 
| **For  the quarter ended September 30, 2001** |   | **Commission  File Number** |   | **1-13591** |
|-----------------------------------------------|--------|-----------------------------|--------|-------------|

 

 

**AXS-ONEINC.**

(Exact name of registrantas specified in its charter)

** **

| **Delaware**                                                    |   | **13-2966911**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **301 Route 17 North**                                          |   |                                  |
| **Rutherford, New Jersey**                                      |   | **07070**                             |
| (Address of principal  executive offices)                       |   | (Zip Code)                            |

 

**(201) 935-3400**

(Registrant’s telephonenumber, including area code)

 

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

 

YES          ý                              NO          o

 

 

 

Number ofshares outstanding of the issuer’s common stock as of November 2, 2001

 

 

| **Class**                                |   | **Number  of Shares Outstanding** |
|------------------------------------------|--------|-----------------------------------|
| Common Stock, par value  $0.01 per share |   | 24,784,742                        |

 

 

 

**AXS-ONE INC.**

 

 

**INDEX**

 

** **
|  **PART I** | **FINANCIAL  INFORMATION** |                                                                                                                         |
|------------------|----------------------------|------------------------------------------------------------------------------------------------------------------------------|
|             |                       |                                                                                                                         |   |
|             | Item 1.                    | Financial Statements                                                                                                         |   |
|             |                       |                                                                                                                         |   |
|             |                       | Consolidated Balance Sheets  December 31, 2000 and September 30, 2001 (unaudited)                                            |   |
|             |                       | Consolidated  Statements of Operations (unaudited) Three and nine months ended September  30, 2000 and 2001                  |   |
|             |                       | Consolidated  Statements of Comprehensive Income (Loss) (unaudited) Three and nine months  ended September 30, 2000 and 2001 |   |
|             |                       | Consolidated  Statements of Cash Flows (unaudited) Nine months ended September 30, 2000 and  2001                            |   |
|             |                       | Notes  to Consolidated Interim Financial Statements                                                                          |   |
|             |                       |                                                                                                                         |   |
|             | Item  2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |   |
|             |                       |                                                                                                                         |   |
|             | Item  3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |   |
|             |                       |                                                                                                                         |   |
| **PART  II**     | **OTHER  INFORMATION**     |                                                                                                                         |
|             |                       |                                                                                                                         |   |
|             | Item 1.                    | Legal Proceedings                                                                                                            |   |
|             |                       |                                                                                                                         |   |
|             | Item 6.                    | Exhibits and  Reports on Form 8-K                                                                                            |   |
|             |                       |                                                                                                                         |   |
| **SIGNATURES**   |                       |                                                                                                                         |
|             |                       |                                                                                                                         |   |
|             | Signatures                 |                                                                                                                         |

 

 

**AXS-ONEINC. AND SUBSIDIARIES********CONSOLIDATED BALANCE SHEETS********(Inthousands, except per share data)**

 
|                                                                                                                                                          |   |                      |          |                       |              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------------|----------------------------|-------------------|
|                                                                                                                                                          |   |                      | ** **    |                       | ** **        |
|                                                                                                                                                          |   | **December  31,****2000** |          | **September  30,****2001** | **   ** |
|                                                                                                                                                          |   | **(Unaudited****)**       |          |
| **ASSETS**                                                                                                                                                    |   |                      |          |                       |              |
| Current assets:                                                                                                                                               |   |                      |          |                       |              |
| Cash and cash  equivalents                                                                                                                                    |   | $                         | 2,207         |                       | $                 | 627 |   |
| Restricted cash                                                                                                                                               |   | 50                        |          | 44                         |              |
| Note receivable  - short-term portion, net of short-term portion of deferred gain on sale of  subsidiary of $164 at September 30, 2001                   |   | -                         |     | 177                        |         |
| Accounts  receivable, net of allowance for doubtful accounts of $1,060 and  $723 at December 31, 2000 and September 30, 2001,  respectively         |   | 7,832                     |     | 5,316                      |         |
| Prepaid expenses  and other current assets                                                                                                                    |   | 691                       |          | 609                        |              |
| Total current  assets                                                                                                                                         |   | 10,780                    |          | 6,773                      |              |
| Equipment and  leasehold improvements, at cost:                                                                                                               |   |                      |          |                       |              |
| Computer and  office equipment                                                                                                                                |   | 12,045                    |          | 10,372                     |              |
| Furniture and  fixtures                                                                                                                                       |   | 1,198                     |          | 954                        |              |
| Leasehold  improvements                                                                                                                                       |   | 1,084                     |          | 1,035                      |              |
|                                                                                                                                                          |   | 14,327                    |          | 12,361                     |              |
| Less--accumulated  depreciation and amortization                                                                                                              |   | 13,057                    |          | 11,471                     |              |
|                                                                                                                                                          |   | 1,270                     |          | 890                        |              |
| Capitalized  software development costs, net of accumulated amortization of  $5,743 and $6,546 at December 31, 2000 and September 30, 2001, respectively |   | 3,030                     |          | 2,977                      |              |
| Investment in  and loans to joint ventures                                                                                                                    |   | -                         |          | 287                        |              |
| Other assets                                                                                                                                                  |   | 104                       |          | 62                         |              |
|                                                                                                                                                          |   | $                         | 15,184        |                       | $                 | 10,989 |   |
|                                                                                                                                                          |   |                      |          |                       |              |
| **LIABILITIES AND STOCKHOLDERS'  DEFICIT**                                                                                                                    |   |                      |          |                       |              |
| Current  liabilities:                                                                                                                                         |   |                      |          |                       |              |
| Current portion  of long-term debt                                                                                                                            |   | $                         | 1,700         |                       | $                 | 1,800 |   |
| Accounts payable                                                                                                                                              |   | 3,107                     |          | 2,729                      |              |
| Accrued expenses                                                                                                                                              |   | 5,467                     |          | 5,011                      |              |
| Deferred revenue                                                                                                                                              |   | 7,496                     |          | 8,676                      |              |
| Total current  liabilities                                                                                                                                    |   | 17,770                    |          | 18,216                     |              |
|                                                                                                                                                          |   |                      |          |                       |              |
| Long-term debt,  net of current portion                                                                                                                       |   | 1,222                     |          | 1,799                      |              |
| Stockholders'  deficit:                                                                                                                                       |   |                      |          |                       |              |
| Preferred stock,  $.01 par value, authorized 5,000 shares,  no shares issued and outstanding                                                             |   | -                         |          | -                          |              |
| Common stock,  $.01 par value, authorized 50,000 shares;   24,785 shares issued  and outstanding at December 31, 2000 and September 30, 2001        |   | 248                       |          | 248                        |              |
| Additional  paid-in capital                                                                                                                                   |   | 72,032                    |          | 72,032                     |              |
| Accumulated  deficit                                                                                                                                          |   | (76,038                   | )             | (81,584                    | )                 |
| Accumulated  other comprehensive income (loss)                                                                                                                |   | (50                       | )             | 278                        |              |
| Total  stockholders' deficit                                                                                                                                  |   | (3,808                    | )             | (9,026                     | )                 |
|                                                                                                                                                          |   | $                         | 15,184        |                       | $                 | 10,989 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

 

 

**AXS-ONE INC. AND SUBSIDIARIES********CONSOLIDATED STATEMENTS OFOPERATIONS********(Inthousands, except per share data)**

**(Unaudited)**

 
|                                                      |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                      |   | **September 30,**      |   | **September 30,**     |   |
|                                                      |   | **2000**               |   | **2001**              |   | **2000** |   | **2001** |   |
| Revenues:                                                 |   |                   |   |                  |   |   |   |   |   |
| License fees                                              |   | $                      | 3,393  |                  | $      | 773 |   | $ | 7,126 |   | $ | 4,014 |   |
| Services                                                  |   | 9,921                  |   | 8,718                 |   | 30,374 |   | 26,697 |   |
| Total revenues                                            |   | 13,314                 |   | 9,491                 |   | 37,500 |   | 30,711 |   |
|                                                      |   |                   |   |                  |   |   |   |   |   |
| Operating  expenses:                                      |   |                   |   |                  |   |   |   |   |   |
| Cost of license  fees                                     |   | 324                    |   | 316                   |   | 1,021 |   | 1,057 |   |
| Cost of services                                          |   | 4,871                  |   | 3,727                 |   | 15,812 |   | 13,732 |   |
| Sales and  marketing                                      |   | 3,106                  |   | 1,502                 |   | 7,595 |   | 7,763 |   |
| Research and  development                                 |   | 1,652                  |   | 1,608                 |   | 5,174 |   | 5,338 |   |
| General and  administrative                               |   | 2,356                  |   | 1,790                 |   | 6,782 |   | 6,856 |   |
| Restructuring  and other costs, net                       |   | -                      |   | (166                  | )      | - |   | 937 |   |
| Total operating  expenses                                 |   | 12,309                 |   | 8,777                 |   | 36,384 |   | 35,683 |   |
| Operating income  (loss)                                  |   | 1,005                  |   | 714                   |   | 1,116 |   | (4,972 | ) |
| Other income  (expense):                                  |   |                   |   |                  |   |   |   |   |   |
| Interest income                                           |   | 12                     |   | 4                     |   | 56 |   | 99 |   |
| Interest expense                                          |   | (99                    | )      | (151                  | )      | (297 | ) | (354 | ) |
| Equity in losses  of joint ventures                       |   | -                      |   | (103                  | )      | - |   | (176 | ) |
| Other income  (expense)                                   |   | (25                    | )      | 23                    |   | (5 | ) | (143 | ) |
| Other expense,  net                                       |   | (112                   | )      | (227                  | )      | (246 | ) | (574 | ) |
| Net income  (loss)                                        |   | $                      | 893    |                  | $      | 487 |   | $ | 870 |   | $ | (5,546 | ) |
|                                                      |   |                   |   |                  |   |   |   |   |   |
| Basic net income  (loss) per  common share           |   | $                      | 0.04   |                  | $      | 0.02 |   | $ | 0.04 |   | $ | (0.22 | ) |
| Diluted net  income (loss) per  common share         |   | $                      | 0.03   |                  | $      | 0.02 |   | $ | 0.03 |   | $ | (0.22 | ) |
| Weighted average  basic common  shares outstanding   |   | 24,785                 |   | 24,785                |   | 24,570 |   | 24,785 |   |
| Weighted average  diluted common  shares outstanding |   | 25,603                 |   | 24,875                |   | 25,995 |   | 24,785 |   |
|                                                           |        |                        |        |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS**

**OF COMPREHENSIVE INCOME (LOSS)**

**(In thousands)**

**(Unaudited)**

 
|                                                                      |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|---------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                      |   | **September  30,**      |   | **September  30,**     |   |
|                                                                      |   | **2000**                |   | **2001**               |   | **2000** |   | **2001** |   |
|                                                                      |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                                         |   | $                       | 893    |                   | $      | 487 |   | $ | 870 |   | $ | (5,546 | ) |
| Foreign currency translation adjustment                                   |   | (91                     | )      | (74                    | )      | (75 | ) | (79 | ) |
| Reclassification adjustment for losses included in net income (loss) |   | -                       |   | 167                    |   | - |   | 407 |   |
| Comprehensive income (loss)                                               |   | $                       | 802    |                   | $      | 580 |   | $ | 795 |   | $ | (5,218 | ) |
|                                                                           |        |                         |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS****OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 

 
|                                                                                                             |   | **Nine Months Ended** |           |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------|----------------|
|                                                                                                             |   | **September 30,**     |           |
|                                                                                                             |   | **2000**              |           | **2001** |   |
| Cash flows from  operating activities:                                                                           |   |                  |           |   |   |
| Net income  (loss)                                                                                               |   | $                     | 870            |   | $ | (5,546 | ) |
| Adjustments to  reconcile net income (loss) to net cash flows provided by (used in) operating  activities - |   |                  |      |   |      |
| Depreciation and  amortization                                                                                   |   | 1,588                 |           | 1,538 |   |
| Net provision  for (recovery of) doubtful accounts                                                               |   | 46                    |           | (56 | ) |
| Loss on disposal  of equipment and leashold improvements                                                         |   | -                     |           | 17 |   |
| Non-cash portion  of restructuring and other costs                                                               |   | -                     |           | 308 |   |
| Loss on equity  method investments                                                                               |   | -                     |           | 176 |   |
| Changes in  current assets and liabilities, net of divestiture                                                   |   |                  |           |   |   |
| Restricted cash                                                                                                  |   | (7                    | )              | - |   |
| Accounts  receivable                                                                                             |   | 330                   |           | 1,123 |   |
| Prepaid expenses  and other current assets                                                                       |   | 377                   |           | (40 | ) |
| Accounts payable  and accrued expenses                                                                           |   | (1,670                | )              | 79 |   |
| Deferred revenue                                                                                                 |   | (619                  | )              | 1,544 |   |
| Net cash flows  provided by (used in) operating activities                                                       |   | 915                   |           | (857 | ) |
|                                                                                                             |   |                  |           |   |   |
| Cash flows used  in investing activities:                                                                        |   |                  |           |   |   |
| Change in other  assets                                                                                          |   | -                     |           | 40 |   |
| Capitalized  software development costs                                                                          |   | (1,373                | )              | (750 | ) |
| Purchase of  equipment and leasehold improvements                                                                |   | (813                  | )              | (470 | ) |
| Net cash flows  used in investing activities                                                                     |   | (2,186                | )              | (1,180 | ) |
|                                                                                                             |   |                  |           |   |   |
| Cash flows from  financing activities:                                                                           |   |                  |           |   |   |
| Proceeds from  exercise of stock options and warrants                                                            |   | 1,900                 |           | - |   |
| Proceeds from  issuance of long-term debt                                                                        |   | -                     |           | 2,000 |   |
| Payments of long  term debt and capital lease obligations                                                        |   | (804                  | )              | (1,325 | ) |
| Net cash flows  provided by financing activities                                                                 |   | 1,096                 |           | 675 |   |
| Foreign currency  exchange rate effects                                                                          |   | (228                  | )              | (218 | ) |
| Net decrease in  cash and cash equivalents                                                                       |   | (403                  | )              | (1,580 | ) |
| Cash and cash  equivalents, beginning of period                                                                  |   | 1,154                 |           | 2,207 |   |
| Cash and cash equivalents,  end of period                                                                        |   | $                     | 751            |   | $ | 627 |   |
|                                                                                                             |   |                  |           |   |   |
| Supplemental  disclosures of cash flow information:                                                              |   |                  |           |   |   |
| Cash paid during  the period for -                                                                               |   |                  |           |   |   |
| Interest                                                                                                         |   | $                     | 300            |   | $ | 279 |   |
| Income taxes                                                                                                     |   | $                     | 15             |   | $ | 5 |   |
| Non-cash  investing activities -                                                                                 |   |                  |           |   |   |
| Investment in  and loans to joint ventures                                                                       |   | $                     | -              |   | $ | 463 |   |
| Note received in  connection with sale  of Poland subsidiary                                                |   | $                     | -              |   | $ | 430 |   |
|                                                                                                                  |        |                       |                |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements. 

 

 

**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(In thousands,except per share data)**

 

**(1)  OPERATIONS, BUSINESS CONDITIONS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

The Company designs, markets and supports n-tier, Internet-enabled,client/server, e-commerce, financial, workflow, and desktop data access andstorage software solutions.  The Companyalso offers consulting, implementation, training and maintenance services insupport of its customers’ use of its software products.

 

(a)  ***Basis of Presentation***

 

The accompanying consolidated financial statements include the accountsof AXS-One Inc. (formerly known as Computron Software, Inc.) and its whollyowned subsidiaries located in Australia, Canada, Poland (through August 31,2001 – see Note 7), Singapore, South Africa, and the United Kingdom(collectively, the *"Company*").  During the first quarter of 2001, theCompany’s South Africa operations entered into two joint ventures.  Ownership is 50% or less in both entities.  All significant intercompany transactionsand balances have been eliminated.  TheCompany uses the equity method of accounting for its investments in 20 to50-percent-owned companies.

 

The unaudited consolidated financial statements have been prepared bythe Company in accordance with accounting principles generally accepted in theUnited States of America and, in the opinion of management, contain alladjustments, consisting only of those of a normal recurring nature, necessaryfor a fair presentation of these consolidated financial statements.

 

These consolidated financial statements should be read in conjunctionwith the consolidated financial statements and related notes included in theCompany’s 2000 Annual Report on Form 10-K filed with the Securities andExchange Commission.

 

The results of operations for the three and nine month periods endedSeptember 30, 2001 are not necessarily indicative of results to be expected forany future periods.

 

(b)  ***Revenue Recognition***

 

The Company recognizes revenue in accordance with Statement of Position97-2, “Software Revenue Recognition” (“SOP 97-2”), and Statement of Position98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.”  Revenue fromnon-cancelable software licenses is recognized when the license agreement hasbeen signed, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.  In multipleelement arrangements, the Company defers the vendor-specific objective evidenceof fair value (“VSOE”) related to the undelivered elements and recognizesrevenue on the delivered elements using the residual method.  The most commonly deferred element isinitial post-contract support (maintenance), which is recognized on astraight-line basis over the initial maintenance term.  Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement.  Other deferred elementsinclude consulting and implementation services.  The Company recognizes service revenues from consulting andimplementation services, including training, provided by both its own personneland by third parties, upon performance of the services, pursuant to aprofessional services agreement.  Whenthe Company enters into a license agreement requiring significant customizationof the software products, the Company recognizes revenue relating to theagreement using contract accounting. Anticipated losses, if any, are charged to operations in the period thatsuch losses are determined.

 

**(2)  REVOLVING LINE OF CREDIT AND LONG-TERM DEBT**

 

On March 31, 1998, the Company entered into a Loan and SecurityAgreement (“Agreement”) which provided for maximum borrowings of up to $10million.  The Agreement contained arevolving line of credit and a term loan (the “Initial Term Loan”).

 

Borrowings under the revolving line of credit bear interest at primerate plus 1.25%.  The Agreement providesfor yearly fees as follows:  (i) $111 inyear one, $86 in years two and three, $77 in year four, $74 in years five andsix and (ii) an unused revolving line of credit fee of .375% per annum.  The Agreement is secured by substantiallyall domestic assets of the Company together with a pledge of 65% of the stockof its foreign subsidiaries, and contains certain restrictive financialcovenants. Under the revolving line of credit the Company currently hasavailable the lesser of $5 million or 85% of eligible receivables, asdefined.  The net available amount underthe revolving line of credit at September 30, 2001 was approximately $1.6million of which no amounts were outstanding.

 

The Initial Term Loan provided for $5 million available in one drawdownwhich the Company borrowed on the closing date.  The Initial Term Loan bears interest at the prime rate as defined(6.0% at September 30, 2001) plus 1.5%, and was repayable in 36 monthlyinstallments beginning May 1, 1998.

 

Effective December 22, 1999, in connection with the sale of itssubsidiary in France, the Company amended the Agreement (Amendment No. 7) inorder to make available to the Company a second term loan in the originalprincipal amount of $1.3 million, which the Company borrowed on that date andtogether with the Initial Term Loan, collectively the “A Term Loan,” and athird term loan (the “B Term Loan”) in the original principal amount of $750, ofwhich the Company borrowed $500 on November 3, 2000 and requested the remaining$250 on December 31, 2000 which was subsequently remitted and recorded on theCompany’s books on January 2, 2001.

 

The A Term Loan bears interest at the rate of prime as defined (6.0% atSeptember 30, 2001) plus 1.5%.  The BTerm Loan bears interest at the fixed rate of 12.0%.

 

Effective March 16, 2001, the Company further amended the Agreement(Amendment No. 9) in order to make available an additional term loan (the“Additional B Term Loan”) in the original principal amount of up to $2.0million, of which the Company borrowed $750 on April 30, 2001, $500 on May 30,2001 and $500 on July 31, 2001, to extend the termination date of the creditfacility to March 31, 2004 and to establish restrictive financial covenants for2001.

 

The Additional B Term Loan provides for not more than threeborrowings.  Each request for aborrowing under the Additional B Term Loan must specify  the amount of the requested Term Loan, whichcannot exceed (A) $750 if such request is made on or after March 16, 2001 butbefore December 31, 2001, plus (B) an additional $500 if such request is madeon or after April 30, 2001 but before December 31, 2001, of which the Companyborrowed the $500 in July 2001, plus (C) an additional $750 if such request ismade on or after July 31, 2001 but before December 31, 2001, and which must bein a minimum amount of $500.  Theavailability of the Additional B Term Loan is subject to the Company’scompliance with the 2001 financial covenants.

 

On June 29, 2001, the Company further amended the Agreement (AmendmentNo. 10) to reduce the amount of the third and final borrowing under AmendmentNo. 9 from $750 to $500 and to change the availability date from July 31, 2001to June 29, 2001 and to modify the financial covenants.  The Company borrowed the $500 in July2001.  The amendment eliminated thefinancial covenant requirement for June 30, 2001, and set two new monthlycovenants for the remainder of 2001 based on EBITDA (earnings before interest,taxes and depreciation and amortization) and minimum revenue requirements.  The Company was in compliance with these newmonthly covenants as of September 30, 2001.

 

The aggregate outstanding principal amount of the Term Loans is repayablein monthly installments of $150 beginning April 1, 2001 over the remaining termof the Loan and Security Agreement, in accordance with Amendment No. 10.

 

Amendment No. 10 provides a limitation that if the total outstandingbalance of Term Loans exceeds at any time the lessor of (i) 45% of eligiblemaintenance revenues through December 31, 2001, 40% of eligible maintenancerevenues from January 1, 2002 through December 31, 2002, 25% of eligiblemaintenance revenues from January 1, 2003 through March 31, 2004 and (ii) $4.5million, then the Company is required to prepay the principal amount in anamount sufficient to cause the aggregate principal amount of the Term Loans tobe less than or equal to the relevant limits set forth above.  As of September 30, 2001, eligiblemaintenance revenues as defined, totaled approximately $11.3 million.

 

**(3)  CONTINGENCIES**

 

The Securities and Exchange Commission (SEC) performedan investigation of the Company and of certain former employees and officers ofthe Company relating to activities performed through 1996 while they wereemployees of the Company.  The Companyfiled a Form 8-K with the SEC on February 15, 2001 disclosing the SECinvestigation and its disposition with respect to the Company. In mid August2001, the Company was informed by counsel for its former employees andofficers, whom the Company knew to be the subject of the SEC investigation,that such counsel had been informed by the SEC that the SEC was no longerpursuing its investigation of their clients. Under the Company’s certificate of incorporation, and Delaware law, theCompany is obligated to reimburse legal fees to former employees and officersrelating to actions taken against them for work performed while they wereemployed by the Company.  Approximately$0.8 million in such legal fees were recorded during the nine months endedSeptember 30, 2001.

 

Historically, the Company has been involved in other disputes and/orlitigation encountered in its normal course of business.  The Company believes that the ultimateoutcome of these proceedings will not have a material adverse effect on theCompany's business, consolidated financial condition, results of operations orcash flows.

 

**(4)  BASIC AND DILUTED NET INCOME (LOSS) PERCOMMON SHARE**

 

Basic and diluted net income (loss) per common share is presented inaccordance with SFAS No. 128, "Earnings per Share" ("SFAS No.128").

 

Basic net income (loss) per common share is based on the weightedaverage number of shares of common stock outstanding during the period.  Diluted net loss per common share is thesame as basic net loss per common share for the nine months ended September 30,2001 since the effect of stock options and warrants is anti-dilutive.  Diluted net income (loss) per common sharefor the three and nine months ended September 30, 2001 does not include theeffects of outstanding options to purchase 4,717 and 5,392 shares of commonstock, respectively, and outstanding warrants to purchase 476 and 476 shares ofcommon stock, respectively, as the effect of their inclusion is anti-dilutivefor the periods.

 

The following represents the calculations of the basic and diluted netincome (loss) per common share for the three and nine months ended September30, 2000 and 2001.

 
|                                                                   |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                   |   | **September  30,**     |   | **September  30,**    |   |
|                                                                   |   | **2000**               |   | **2001**              |   | **2000** |   | **2001** |   |
|                                                                   |   |                   |   |                  |   |   |   |   |   |
| Net income  (loss)                                                     |   | $                      | 893    |                  | $      | 487 |   | $ | 870 |   | $ | (5,546 | ) |
|                                                                   |   |                   |   |                  |   |   |   |   |   |
| Weighted average basic  common shares outstanding during the periods   |   | 24,785                 |   | 24,785                |   | 24,570 |   | 24,785 |   |
|                                                                   |   |                   |   |                  |   |   |   |   |   |
| Effect of dilutive securities:                                         |   |                   |   |                  |   |   |   |   |   |
| Stock options and warrants                                             |   | 818                    |   | 90                    |   | 1,425 |   | - |   |
| Weighted  average diluted common shares outstanding during the periods |   | 25,603                 |   | 24,875                |   | 25,995 |   | 24,785 |   |
|                                                                   |   |                   |   |                  |   |   |   |   |   |
| Basic net income  (loss) per common share                              |   | $                      | 0.04   |                  | $      | 0.02 |   | $ | 0.04 |   | $ | (0.22 | ) |
|                                                                   |   |                   |   |                  |   |   |   |   |   |
| Diluted net  income (loss) per common share                            |   | $                      | 0.03   |                  | $      | 0.02 |   | $ | 0.03 |   | $ | (0.22 | ) |

 

**(5)  RESTRUCTURING ANDOTHER COSTS**

 

During June 2001, based on weakening economies,especially in the United States and to a lesser degree in certain foreignlocations, the Company eliminated 45 positions in the United States andeliminated eight positions, wrote-off certain non-performing assets andrecorded a charge for remaining leases in certain foreign operations.  The Company recorded a charge to operationsin the second quarter totaling approximately $1.1 million for these items,reflecting approximately $0.6 million in termination costs of those personnelas well as $0.3 million in asset and cumulative foreign currency translationadjustment write-offs and $0.2 million in lease costs.  During the third quarter, the Companyadjusted the charge to operations by approximately $(0.2) million reflecting revisedtermination and lease costs.  Theactivity related to this restructuring is as follows:

 
| **(in thousands)**                                                          |   |   |   | **Employee  Termination Costs** |   | **Asset  and Cumulative Foreign Currency Translation Adjustment Write-Offs** |   | **Lease  Costs** |    | **Total  Costs** |   |
|-----------------------------------------------------------------------------|--------|--------|--------|---------------------------------|--------|------------------------------------------------------------------------------|--------|------------------|---------|------------------|--------|
| Restructuring and other costs recorded in June 2001                         |   | $      | 603    |                            | $      | 300                                                                          |   | $                | 200     |             | $      | 1,103 |   |
| Revision of the restructuring costs in September  2001                      |   | (138   | )      | -                               |   | (28                                                                          | )      | (166             | )       |
| Cash payments through September 30, 2001                                    |   | (364   | )      | -                               |   | (3                                                                           | )      | (367             | )  |
| Write-off of assets and cumulative foreign currency  translation adjustment |   | -      |   | (300                            | )      | -                                                                            |   | (300             | )       |
| Restructuring liability at September 30, 2001                               |   | $      | 101    |                            | $      | -                                                                            |   | $                | 169     |             | $      | 270 |   |

 

The Company will continueto review its operations throughout the remainder of the year, which may resultin additional actions and charges during the last quarter of 2001.

 

**(6)   OPERATINGSEGMENTS**

 

As of December 31, 1999 the Company’s operations were conducted in onebusiness segment which was the licensing of software and related services.  Beginning on January 1, 2000, the Companywas reorganized into three separate business segments based on products as partof its strategy to focus on certain market opportunities.  The three business segments are as follows:

 

a)     The AXS-One Enterprise Solutions segment isfocused on marketing E-Financials and Internet Self-Service Solutions to Global2000 companies in North America and internationally who need to streamlinetheir business internally as well as collaborate with their customers, partnersand vendors.  AXS-One EnterpriseSolutions is also responsible for servicing and managing the Company'sextensive installed base of customers. Enterprise Solutions enable organizations to reduce expenses, improveproductivity, and leverage the Internet while retaining their investments intechnology and people.

 

b)    The AXSPoint Solutions segment is focused onidentifying markets that need to rapidly leverage the Internet incommunicating, exchanging or reconciling large volumes of knowledge with theircustomers, suppliers and partners.  TheAXSPoint Solutions segment targets large information-centric organizations thatcan utilize self-service information systems to improve communications withtheir customers and improve access to business intelligence.

 

c)     The Tivity Solutions segment has beenchartered with delivering a full suite of business solutions and services toorganizations that primarily sell professionals’ time.

 

The accounting policies of the reportablesegments are the same as those described in Note 1 of Notes to ConsolidatedFinancial Statements included in the 2000 Annual Report on Form 10K.  The Company evaluates the performance of itsoperating segments based on revenues and operating income (loss).  Intersegment sales and transfers are notsignificant.

 

Summarized financial information concerning theCompany’s reportable segments is shown in the following table. The ChiefExecutive Officer uses the information below in this format while makingdecisions about allocating resources to each segment and assessing itsperformance.

 

 
|                                       |   | **AXS-One**    |   |          |   |          |   |      |   |
|--------------------------------------------|--------|----------------|--------|---------------|--------|---------------|--------|-----------|--------|
|                                       |   | **Enterprise** |   | **AXSPoint**  |   | **Tivity**    |   |      |   |
|                                       |   | **Solutions**  |   | **Solutions** |   | **Solutions** |   | **Total** |   |
|                                       |   |           |   |          |   |          |   |      |   |
| **Three Months Ended September 30,  2000** |   |           |   |          |   |          |   |      |   |
| Revenues:                                  |   |           |   |          |   |          |   |      |   |
| License fees                               |   | $              | 2,277  |          | $      | 928           |   | $         | 188    |   | $ | 3,393 |   |
| Services                                   |   | 8,004          |   | 972           |   | 945           |   | 9,921     |   |
| Total revenues                             |   | 10,281         |   | 1,900         |   | 1,133         |   | 13,314    |   |
| Operating income                           |   | 2,472          |   | 926           |   | 137           |   | 3,535     |   |
| Total assets                               |   | 13,075         |   | 1,506         |   | 1,885         |   | 16,466    |   |
| Capital  expenditures                      |   | 327            |   | 25            |   | 28            |   | 380       |   |
| Depreciation and  amortization             |   | 465            |   | 22            |   | 37            |   | 524       |   |
|                                       |   |           |   |          |   |          |   |      |   |
| **Three Months Ended September 30,  2001** |   |           |   |          |   |          |   |      |   |
| Revenues:                                  |   |           |   |          |   |          |   |      |   |
| License fees                               |   | $              | 651    |          | $      | 104           |   | $         | 18     |   | $ | 773 |   |
| Services                                   |   | 6,813          |   | 1,153         |   | 752           |   | 8,718     |   |
| Total revenues                             |   | 7,464          |   | 1,257         |   | 770           |   | 9,491     |   |
| Operating income                           |   | 2,062          |   | 547           |   | 49            |   | 2,658     |   |
| Total assets                               |   | 9,005          |   | 1,101         |   | 883           |   | 10,989    |   |
| Capital  expenditures                      |   | 6              |   | 1             |   | 1             |   | 8         |   |
| Depreciation and  amortization             |   | 432            |   | 17            |   | 32            |   | 481       |   |
|                                       |   |           |   |          |   |          |   |      |   |
|                                       |   |           |   |          |   |          |   |      |   |
| **Nine Months Ended September 30,  2000**  |   |           |   |          |   |          |   |      |   |
| Revenues:                                  |   |           |   |          |   |          |   |      |   |
| License fees                               |   | $              | 5,150  |          | $      | 1,713         |   | $         | 263    |   | $ | 7,126 |   |
| Services                                   |   | 24,723         |   | 2,564         |   | 3,087         |   | 30,374    |   |
| Total revenues                             |   | 29,873         |   | 4,277         |   | 3,350         |   | 37,500    |   |
| Operating income                           |   | 6,580          |   | 1,392         |   | 476           |   | 8,448     |   |
| Total assets                               |   | 13,075         |   | 1,506         |   | 1,885         |   | 16,466    |   |
| Capital  expenditures                      |   | 701            |   | 56            |   | 56            |   | 813       |   |
| Depreciation and  amortization             |   | 1,422          |   | 78            |   | 88            |   | 1,588     |   |
|                                       |   |           |   |          |   |          |   |      |   |
| **Nine  Months Ended September 30, 2001**  |   |           |   |          |   |          |   |      |   |
| Revenues:                                  |   |           |   |          |   |          |   |      |   |
| License fees                               |   | $              | 3,220  |          | $      | 575           |   | $         | 219    |   | $ | 4,014 |   |
| Services                                   |   | 21,008         |   | 3,179         |   | 2,510         |   | 26,697    |   |
| Total revenues                             |   | 24,228         |   | 3,754         |   | 2,729         |   | 30,711    |   |
| Operating income (loss)                    |   | 2,377          |   | 675           |   | (724          | )      | 2,328     |   |
| Total assets                               |   | 9,005          |   | 1,101         |   | 883           |   | 10,989    |   |
| Capital  expenditures                      |   | 393            |   | 37            |   | 37            |   | 467       |   |
| Depreciation and  amortization             |   | 1,363          |   | 56            |   | 98            |   | 1,517     |   |

 

 

Reconciliation of total segment operating income toconsolidated operating income (loss):

 
|                                            |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                            |   | **September 30,**      |   | **September 30,**     |   |
|                                            |   | **2000**               |   | **2001**              |   | **2000** |   | **2001** |   |
| Operating income  from reportable segments      |   | $                      | 3,535  |                  | $      | 2,658 |   | $ | 8,448 |   | $ | 2,328 |   |
| Unallocated  general and administrative expense |   | (2,252                 | )      | (1,739                | )      | (6,400 | ) | (6,664 | ) |
| Other corporate  unallocated expenses           |   | (278                   | )      | (205                  | )      | (932 | ) | (636 | ) |
| Total  consolidated operating income (loss)     |   | $                      | 1,005  |                  | $      | 714 |   | $ | 1,116 |   | $ | (4,972 | ) |

 

**(7)  ****DIVESTITURES**

 

On September 20, 2001, the Company sold its wholly-owned subsidiarylocated in Warsaw, Poland (AXO-Poland) to Porterfield International Ltd., acompany wholly-owned by the former managing director of AXO-Poland and hiswife.  The Company receivedconsideration in the form of a Promissory Note of Buyer in the face amount of$430.  The Note is payable in 15 monthlyinstallments ending on December 1, 2002 and bears interest at the fixed rate of6.75% per year.  Net assets of thePoland operations of $(3) at the time of the sale offset by accrued expenses of$180 directly related to the sale resulted in a deferred gain of approximately$253, which the Company recorded in accordance with the Securities and ExchangeCommission’s Staff Accounting Bulletin No. 81 (SAB 81), “Gain Recognition onthe Sale of a Business or Operating Assets to a Highly Leveraged Entity.”  In accordance with SAB 81, the Companypresented in the accompanying consolidated balance sheets $164 of the deferredgain as an offset to the short-term portion of the note receivable and theremaining $89 of the deferred gain as an offset to the long-term portion,effectively reducing the long-term portion of the note receivable to zero.  The Company will recognize such gain as thenote receivable is paid, but only after $177 in payments have been made on thenote receivable.

 

The following table sets forth significant financial data of the Polandsubsidiary prior to its disposition included in the consolidated results ofoperations for the three and nine months ended September 30, 2001.

 
|                         |   | **Three Months Ended** |   | **Nine Months Ended**  |   |
|------------------------------|--------|------------------------|--------|------------------------|--------|
|                         |   | **September 30, 2001** |   | **September 30, 2001** |   |
| Revenues:                    |   |                   |   |                   |   |
| License fees                 |   | $                      | -      |                   | $      | 205 |   |
| Services                     |   | 272                    |   | 1,208                  |   |
|                         |   | 272                    |   | 1,413                  |   |
|                         |   |                   |   |                   |   |
| Total  operating expenses    |   | 449                    |   | 1,745                  |   |
| Operating loss               |   | (177                   | )      | (332                   | )      |
| Other income  (expense), net |   | (14                    | )      | 29                     |   |
| Net loss                     |   | $                      | (191   | )                      | $      | (303 | ) |

 

**Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion should be read in conjunction with theConsolidated Interim Financial Statements and Notes thereto and is qualified inits entirety by reference thereto.

 

This Report contains statements of a forward-lookingnature within the meaning of the safe harbor provisions of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, relating to future events or the future financialperformance of the Company.  Investorsare cautioned that such statements are only predictions and that actual eventsor results may differ materially.  Inevaluating such statements, investors should specifically consider the variousfactors identified in this Report which could cause actual results to differmaterially from those indicated by such forward-looking statements, includingthe matters set forth in "Business--Risk Factors" in the Company’s2000 Annual Report on Form 10K.

 

**Overview**

 

In November 2000, the Company changed its name to AXS-One Inc. fromComputron Software, Inc., in order to better reflect the direction of theCompany to a new family of products.

 

The Company was founded in 1978 as a developer of custom financialsoftware for mission-critical applications in large organizations, primarilyfinancial institutions.  In the early1980's, the Company developed financial software for legacy platforms andintroduced sophisticated enterprise-wide financial software.  Identifying the need for client/serverfinancial software applications in the late 1980's, the Company commenced there-architecture of its financial software and began the development anddeployment of new products, specifically a workflow and document managementproduct.  In 1993, the Company introducedFinancials and Workflow, the client/server versions of its financial andworkflow products. COOL, our on-line data storage product, was introduced inthe latter half of 1993.  Since 1994,the Company has released versions of its products with the capability tointeroperate with popular RDBMS software.

 

In 1999 the Company started a major development effort to build a suiteof electronic commerce solutions based upon its next generation n-tierInternet-architecture.  This new familyof products, e-CelleratorÔproducts, is designed to meet the needs of organizations that wish to conductbusiness across the Internet. e-Cellerator products are used to build two families of solutions,AXS-OneÔ Enterprise solutions and AXSPointÔsolutions.  AXS-One Enterprise solutionsare designed to enable businesses to conduct business transactions across theInternet.  AXSPoint solutions aredesigned to enable organizations to exchange information and knowledge acrossthe Internet.  These two families ofsolutions were announced in the fourth quarter of 1999, and AXS-One Enterprisesolutions and AXSPoint solutions modules were made available throughout 2000and will continue to be made available in 2001 and beyond.  See “Item 1.  Business” in the Company’s 2000 Annual Report on Form 10K.

 

In September 2001, the Company sold its wholly-owned subsidiary locatedin Warsaw, Poland.

 

The Company's revenues are derived from license fees and services.  Revenue from non-cancelable softwarelicenses is recognized when the license agreement has been signed, delivery hasoccurred, the fee is fixed or determinable and collectibility is probable. Inmultiple element arrangements, the Company defers the vendor-specific objectiveevidence of fair value (“VSOE”) related to the undelivered elements andrecognizes revenue on the delivered elements using the residual method.  The most commonly deferred element isinitial post contract support (maintenance), which is recognized on astraight-line basis over the initial maintenance term.  Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement.  Other deferred elementsinclude consulting and implementation services.  Revenues for consulting, maintenance and implementation services,including training, are recognized upon performance of the services.  When the Company enters into a licenseagreement requiring development or significant customization of the softwareproducts, the Company recognizes revenue relating to the agreement using contractaccounting.  The Company's licenseagreements generally do not provide a right of return.  Historically, the Company's backlog has notbeen substantial, since products are generally shipped and consulting servicesare generally rendered as orders are received.

 

The Company has experienced, and may in the futureexperience, significant fluctuations in its quarterly and annual revenues andresults of operations and cash flows. The Company believes that domestic and international operating resultsand cash flows will continue to fluctuate significantly in the future as aresult of a variety of factors, including the timing of revenue recognitionrelated to significant license agreements, the lengthy sales cycle for theCompany's products, the proportion of revenues attributable to license feesversus services, the utilization of third parties to perform services, theamount of revenue generated by resales of third party software, changes inproduct mix, demand for the Company's products, the size and timing ofindividual license transactions, the introduction of new products and productenhancements by the Company or its competitors, changes in customers' budgets,competitive conditions in the industry and general economic conditions.  For a description of certain factors thatmay affect the Company's operating results, see "Business-RiskFactors" in the Company’s 2000 Annual Report on Form 10K.

 

The Company incurred net losses of $9.0 million, $3.7 million and $0.3million in 1998, 1999 and 2000, respectively and operating losses of $8.9 million,$1.2 million and $0.2 million in 1998, 1999 and 2000, respectively.  The Company reported net income of $0.5million and a net loss of $5.5 million for the three and nine months endedSeptember 30, 2001, respectively and operating income of $0.7 million and anoperating loss of $5.0 million, respectively for the same periods.

 

**New Accounting Standards**

 

In the second quarter of 1998, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,“Accounting for Derivative Instruments and Hedging Activities.  In June 2000, the FASB issued SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities –an amendment of FASB Statement No. 133.” SFAS No. 133 and SFAS No. 138 require an entity to recognize allderivatives as either assets or liabilities in the statement of financialposition and measure those instruments at fair value.  Gains or losses resulting from changes in the values of thosederivatives are accounted for depending on the use of the derivative andwhether it qualifies for hedge accounting. The Company currently does not use derivative instruments and as such,the adoption of SFAS No. 133 and SFAS No. 138 on January 1, 2001 did not have amaterial effect on the Company’s consolidated financial position or results ofoperations.

 

In July 2001, the Financial Accounting Standards Board issued SFAS Nos.141 and 142 (SFAS 141 and SFAS 142), “Business Combinations” and “Goodwill andOther Intangible Assets.”  SFAS 141replaces APB 16 and eliminates pooling-of-interests accountingprospectively.  It also providesguidance on purchase accounting related to the recognition of intangible assetsand accounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization methodto an impairment-only approach.  UnderSFAS 142, goodwill will be tested annually and whenever events or circumstancesoccur indicating that goodwill might be impaired.  SFAS 141 and SFAS 142 are effective for all business combinationscompleted after June 30, 2001.  Uponadoption of SFAS 142, amortization of goodwill recorded for businesscombinations consummated prior to July 1, 2001 will cease, and intangibleassets acquired prior to July 1, 2001 that do not meet the criteria forrecognition under SFAS 141 will be reclassified to goodwill.  Companies are required to adopt SFAS 142 forfiscal years beginning after December 15, 2001.  In connection with the adoption of SFAS 142, companies will berequired to perform a transitional goodwill impairment assessment.  The Company believes that the adoption ofSFAS 142, beginning on January 1, 2002, will have no effect on the Company’sconsolidated financial position or results of operations.

 

In August 2001, the FASB issued Statement No. 144 (SFAS 144)“Accounting for the Impairment or Disposal of Long-Lived Assets.”  This statement addresses financialaccounting and reporting for the impairment or disposal of long-lived assets.  This statement supercedes Statement No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of.  SFAS 144 is requiredto be adopted beginning January 1, 2002. We have not determined the impact, if any, the adoption of SFAS No. 144will have on our financial position or results of operations.

 

**Euro Currency**

 

On January 1, 1999, certain countries of the European Union establishedfixed conversion rates between their existing currencies and one commoncurrency, the euro.  The euro then beganto trade on currency exchanges and to be used in business transactions.  Beginning in January 2002, neweuro-denominated currencies will be issued and the existing local currencieswill be withdrawn from circulation by July 1, 2002. The Company derivedapproximately 35.8% of its total revenues outside the United States for 2000, asignificant portion of which is in Europe. The Company derived approximately 34.7% of its total revenues outsidethe United States for the nine months ended September 30, 2001.  The Company believes the euro conversionwill not have a material effect on the Company’s consolidated financialposition or results of operations.

 

**Resultsof Operations**

 

The following table sets forth for the periodsindicated, certain operating data, and data as a percentage of total revenues:

 
|                               |   | **Three Months Ended** |   |           | **Three Months Ended** |   |
|------------------------------------|--------|------------------------|--------|----------------|------------------------|--------|
|                               |   | **September 30, 2000** |   |           | **September 30, 2001** |   |
|                               |   |                   |   | **Data as a**  |                   |   |   |   | **Data as a** |   |
|                               |   | **As**                 |   | **percent of** |                   |   | **As** |   | **percent of** |   |
| **(In thousands)**                 |   | **Reported**           |   | **revenue**    |                   |   | **Reported** |   | **revenue** |   |
|                               |   | **Unaudited**          |   |           | **Unaudited**          |   |
| Revenues:                          |   |                   |   |           |                   |   |   |   |   |   |
| License fees                       |   | $                      | 3,393  |           | 25.5                   | %      |   | $ | 773 |   | 8.1 | % |
| Services                           |   | 9,921                  |   | 74.5           |                   |   | 8,718 |   | 91.9 |   |
| Total revenues                     |   | 13,314                 |   | 100.0          |                   |   | 9,491 |   | 100.0 |   |
|                               |   |                   |   |           |                   |   |   |   |   |   |
| Operating expenses:                |   |                   |   |           |                   |   |   |   |   |   |
| Cost of license fees               |   | 324                    |   | 2.4            |                   |   | 316 |   | 3.3 |   |
| Cost of services                   |   | 4,871                  |   | 36.6           |                   |   | 3,727 |   | 39.3 |   |
| Sales and marketing                |   | 3,106                  |   | 23.3           |                   |   | 1,502 |   | 15.8 |   |
| Research and development           |   | 1,652                  |   | 12.4           |                   |   | 1,608 |   | 16.9 |   |
| General and administrative         |   | 2,356                  |   | 17.7           |                   |   | 1,790 |   | 18.9 |   |
| Restructuring and other costs      |   | -                      |   | -              |                   |   | (166 | ) | (1.7 | ) |
| Total operating expenses           |   | 12,309                 |   | 92.5           |                   |   | 8,777 |   | 92.5 |   |
| Operating income                   |   | 1,005                  |   | 7.5            |                   |   | 714 |   | 7.5 |   |
| Other income (expense):            |   |                   |   |           |                   |   |   |   |   |   |
| Interest income                    |   | 12                     |   | 0.1            |                   |   | 4 |   | - |   |
| Interest expense                   |   | (99                    | )      | (0.7           | )                      |   | (151 | ) | (1.6 | ) |
| Equity in losses of joint ventures |   | -                      |   | -              |                   |   | (103 | ) | (1.1 | ) |
| Other income (expense)             |   | (25                    | )      | (0.2           | )                      |   | 23 |   | 0.3 |   |
| Other expense, net                 |   | (112                   | )      | (0.8           | )                      |   | (227 | ) | (2.4 | ) |
| Net income                         |   | $                      | 893    |           | 6.7                    | %      |   | $ | 487 |   | 5.1 | % |

 

 
|                               |   | **Nine Months Ended   September 30, 2000** |   |           | **Nine Months Ended   September 30, 2001** |   |
|------------------------------------|--------|--------------------------------------------|--------|----------------|--------------------------------------------|--------|
|                               |   |                                       |   | **Data as a**  |                                       |   |   |   | **Data as a** |   |
|                               |   | **As**                                     |   | **percent of** |                                       |   | **As** |   | **percent of** |   |
| **(In thousands)**                 |   | **Reported**                               |   | **revenue**    |                                       |   | **Reported** |   | **revenue** |   |
|                               |   | **Unaudited**                              |   |           | **Unaudited**                              |   |
| Revenues:                          |   |                                       |   |           |                                       |   |   |   |   |   |
| License fees                       |   | $                                          | 7,126  |           | 19.0                                       | %      |   | $ | 4,014 |   | 13.1 | % |
| Services                           |   | 30,374                                     |   | 81.0           |                                       |   | 26,697 |   | 86.9 |   |
| Total revenues                     |   | 37,500                                     |   | 100.0          |                                       |   | 30,711 |   | 100.0 |   |
|                               |   |                                       |   |           |                                       |   |   |   |   |   |
| Operating expenses:                |   |                                       |   |           |                                       |   |   |   |   |   |
| Cost of license fees               |   | 1,021                                      |   | 2.7            |                                       |   | 1,057 |   | 3.4 |   |
| Cost of services                   |   | 15,812                                     |   | 42.2           |                                       |   | 13,732 |   | 44.7 |   |
| Sales and marketing                |   | 7,595                                      |   | 20.2           |                                       |   | 7,763 |   | 25.3 |   |
| Research and development           |   | 5,174                                      |   | 13.8           |                                       |   | 5,338 |   | 17.4 |   |
| General and administrative         |   | 6,782                                      |   | 18.1           |                                       |   | 6,856 |   | 22.3 |   |
| Restructuring and other costs      |   | -                                          |   | -              |                                       |   | 937 |   | 3.1 |   |
| Total operating expenses           |   | 36,384                                     |   | 97.0           |                                       |   | 35,683 |   | 116.2 |   |
| Operating income (loss)            |   | 1,116                                      |   | 3.0            |                                       |   | (4,972 | ) | (16.2 | ) |
| Other income (expense):            |   |                                       |   |           |                                       |   |   |   |   |   |
| Interest income                    |   | 56                                         |   | 0.1            |                                       |   | 99 |   | 0.3 |   |
| Interest expense                   |   | (297                                       | )      | (0.8           | )                                          |   | (354 | ) | (1.1 | ) |
| Equity in losses of joint ventures |   | -                                          |   | -              |                                       |   | (176 | ) | (0.6 | ) |
| Other expense                      |   | (5                                         | )      | -              |                                       |   | (143 | ) | (0.5 | ) |
| Other expense, net                 |   | (246                                       | )      | (0.7           | )                                          |   | (574 | ) | (1.9 | ) |
| Net income (loss)                  |   | $                                          | 870    |           | 2.3                                        | %      |   | $ | (5,546 | ) | (18.1% | ) |

 

**TotalRevenues**

 

Total revenues decreased 28.7% and 18.1% for the three and nine monthsended September 30, 2001, respectively, as compared to the corresponding prioryear periods.  The decrease in 2001 ismainly attributable to a decrease in service and license revenue in the U.S.operation due to the slow down in the economy, the effects of which are beingfelt throughout the software industry, and to a lesser degree, a decline indemand in certain foreign markets and decline in foreign exchange ratescompared to the U.S. dollar.  If foreignexchange rates remained approximately the same for 2000 and 2001, revenueswould have decreased approximately 27.0% and 16.4% for the three and ninemonths ended September 30, 2001, respectively, compared to the correspondingprior year periods.

 

The Company derived approximately $3.1 million and $10.7 million, or32.1% and 34.7% of its total revenues, from customers outside of the UnitedStates for the three and nine months ended September 30, 2001, respectively,compared to $4.4 million and $14.0 million, or 32.7% and 37.4%, respectively,for the corresponding prior year periods. The Company expects that revenuesfrom customers outside the United States will continue to represent asignificant percentage of its total revenues in the future.  Most of the Company’s international licensefees and services revenue are denominated in foreign currencies.  With respect to the Company’s internationalsales that are US dollar-denominated, decreases in the value of foreigncurrencies relative to the US dollar could make the Company’s products lessprice competitive.

 

**LicenseFees**

 

License fees include revenues from software license agreements andhardware sales entered into between the Company and its customers with respectto both the Company’s products and, to a lesser degree, third party productsresold by the Company.  License feesdecreased $2.6 million and $3.1 million for the three and nine months endedSeptember 30, 2001, respectively, as compared to the corresponding prior yearperiods mainly as a result of the slowdown in the economy which to some degreeresulted in customers delaying or foregoing their purchases of newsoftware.  License fees for the ninemonths ended September 30, 2001 included $1.2 million or 29.9% of total licensefees from one customer.  License feesfor the nine months ended September 30, 2000 included the sale of $1.4 millionto one customer and an additional sale of $0.5 million to another customer.

 

**ServicesRevenue**

 

Services revenue includes fees from software maintenance agreements,training, installation and consulting services.  Maintenance fees are billed separately and are recognized ratablyover the period of the maintenance agreement. Training, installation and consulting service revenues are recognized asthe services are performed.

 

Services revenue decreased 12.1% and 12.1% for the three and ninemonths ended September 30, 2001, respectively, as compared to the correspondingprior year periods.  The majority of thedecrease for the three and nine month periods relates to lower service revenuesin the U.S. operations, due in part to lower license sales and the delay ofconsulting and implementation projects by our customers due to the weakenedeconomy.

 

**Cost ofLicense Fees**

 

Cost of license feesconsists primarily of amortization of capitalized software development costsand amounts paid to third parties with respect to products resold by theCompany in conjunction with licensing of the Company’s products.  The elements can vary substantially fromperiod to period as a percentage of license fees.

 

Cost of license fees decreased slightly for the three months endedSeptember 30, 2001, and increased slightly for the nine month period endedSeptember 30, 2001, as compared to the corresponding prior year periods.  The increase is due to an increase inamortization of capitalized software development costs partially offset by adecrease in license sales which include third party software.

 

**Cost ofServices**

 

Cost of services consists primarily of personnel and third party costsfor product quality assurance, training, installation, consulting and customersupport.

 

Cost of services decreased 23.5% and 13.2% for the three and ninemonths ended September 30, 2001, respectively, as compared to the correspondingprior year periods.  The decrease isprimarily due to a decrease in services revenue and a related decrease in thirdparty service costs.  As a percentage ofservices revenue, cost of services was essentially the same for all periodsexcept the three months ended September 30, 2001.  The margin for the three months ended September 30, 2001 improvedas a significant percentage of the revenue was maintenance, which has a lowercost of service.

 

**Salesand Marketing**

 

Sales and marketing expenses consist primarily of salaries,commissions, bonuses paid to sales and marketing personnel, as well as traveland promotional expenses.

 

Sales and marketing expenses decreased 51.6% for the three months endedSeptember 30, 2001, and increased 2.2% for the nine months ended September 30,2001, as compared to the corresponding prior year periods.  The increase for the nine month period is aresult of increased headcount and marketing costs in the first half of the yearin an effort to promote the Company’s software to new and existingmarkets.  The reduction of headcountresulting from the restructuring in the second quarter along with less bonusand commissions due to lower license revenue resulted in a decrease in salesand marketing expenses for the three months ended September 30, 2001.

 

**Researchand Development**

 

Research and development expenses consist primarily of personnel costs,costs of equipment, facilities, and third party software developmentcosts.  Research and developmentexpenses are generally charged to operations as incurred.  However, certain software development costsare capitalized in accordance with Statement of Financial Accounting StandardsNo. 86 (SFAS 86) “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed.”  Suchcapitalized software development costs are generally amortized over periods notexceeding three years.

 

Excluding the amount of capitalized software development costs,research and development expenses decreased 2.7% for the three months endedSeptember 30, 2001, and increased 3.2% for the nine months ended September 30,2001 from the comparable prior year periods. The increase for the nine month period is mainly due to a decrease incapitalized software development costs. The Company capitalized $0.8 million in software development costs forthe nine months ended September 30, 2001 as compared to $1.4 million for thecomparable prior year period.  The rateof capitalization of software development costs may fluctuate depending on themix and stage of development of the Company’s products.

 

Research and development expenses for the three and nine month periodsended September 30, 2001 decreased 14% and 6.7%, respectively, from thecomparable prior year periods when including the amount of capitalized softwaredevelopment costs for the two periods due to lower headcount in its foreignoperations, and less bonus expense during 2001.

 

**Generaland Administrative**

 

General and administrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outside professionalfees.  General and administrative expensesdecreased 24.0% for the three months ended September 30, 2001, and increased1.1% for the nine months ended September 30, 2001 as compared to the comparableprior year periods.  The decrease forthe three months ended September 30, 2001 is the result of lower headcount, adecrease in professional fees and a decrease in temporary employees.  For the nine month period, the increaseincludes the effects of a reduction of a reserve for sales taxes during thenine months ended September 30, 2000 resulting from conclusion of the relatedtax audits in the first quarter of 2000 that reduced general and administrativeexpenses by $0.5 million for that period. In addition, for the nine months ended September 30, 2001 there was alarge increase in legal fees.

 

Legal fees amounted to $0.8 million for the nine months ended September30, 2001.  These fees relate to theCompany’s obligation, under its certificate of incorporation and Delaware law,to reimburse legal fees to former employees and officers relating to actionstaken against them for work performed while they were employed by theCompany.  The Securities and ExchangeCommission (SEC) performed an investigation of the Company and certain formeremployees and officers of the Company relating to activities performed through1996 while they were employees of the Company. The Company filed a Form 8-K with the SEC on February 15, 2001disclosing this investigation and its disposition with respect to the Company.  In mid August 2001, the Company was informedby counsel for its former employees and officers, whom the Company knew to bethe subject of the SEC investigation, that such counsel had been informed bythe SEC that the SEC was no longer pursuing its investigation of their clients.

 

**Restructuring and Other Costs**

 

During June 2001, based on weakening economies,especially in the United States and to a lesser degree in certain foreignlocations, the Company eliminated 45 positions in the United States andeliminated eight positions, wrote-off certain non-performing assets andrecorded a charge for remaining leases in its foreign operations.  The Company recorded a charge to operationsin the second quarter totaling approximately $1.1 million for these items,reflecting approximately $0.6 million in termination costs of those personnelas well as $0.3 million in asset and cumulative foreign currency translationadjustment write-offs and $0.2 million in lease costs.  During the third quarter, the Companyadjusted the charge to operations by approximately $(0.2) million reflectingrevised termination and lease costs. The activity related to this restructuring is as follows:

 
| **(in thousands)**                                                          |   | **Employee  Termination Costs** |   | **Asset  and Cumulative Foreign Currency Translation Adjustment Write-Offs** |   | **Lease  Costs** |   | **Total  Costs** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------|--------|------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
| Restructuring  and other costs recorded in June 2001                        |   | $                               | 603    |                                                                         | $      | 300              |   | $                | 200    |   | $ | 1,103 |   |
| Revision of the  restructuring costs in September 2001                      |   | (138                            | )      | -                                                                            |   | (28              | )      | (166             | )      |
| Cash payments  through September 30, 2001                                   |   | (364                            | )      | -                                                                            |   | (3               | )      | (367             | )      |
| Write-off of  assets and cumulative foreign currency translation adjustment |   | -                               |   | (300                                                                         | )      | -                |   | (300             | )      |
| Restructuring  liability at September 30, 2001                              |   | $                               | 101    |                                                                         | $      | -                |   | $                | 169    |   | $ | 270 |   |
|                                                                             |        |                                 |        |                                                                              |        |                  |        |                  |        |  |  |  |  |  |  |  |  |

 

These actions taken bythe Company will result in annual savings of approximately $12.0 million.  The Company will continue to review itsoperations throughout the remainder of the year, which may result in additionalactions and charges during the last quarter of 2001.

 

**OtherIncome (Expense)**

 

Other income (expense) net increased to $(227)thousand and $(574) thousand for the three and nine months ended September 30,2001, respectively, from $(112) thousand and $(246) thousand for the three andnine months ended September 30, 2000, respectively, primarily due to the equityin losses of joint ventures in the Company’s South Africa operations.  Interest expense is a result of the intereston a revolving line of credit and term loan (see Note 2 to the ConsolidatedInterim Financial Statements).

 

**SegmentInformation**

 

Beginning on January 1, 2000, the Company was reorganized into threeseparate business segments.  (See Note 6to the Consolidated Interim Financial Statements).  For the three and nine months ended September 30, 2001 theAXS-One Enterprise Solutions segment had license fee revenues of $0.7 millionand $3.2 million, respectively, compared to $2.3 million and $ 5.1 million,respectively, for the comparable prior year periods; services revenue of $6.8million and $21.0 million, respectively, compared to $8.0 million and $24.7million, respectively, for the comparable prior year periods; and operatingincome of $2.1 million and $2.4 million, respectively, compared to $2.5 millionand $6.6 million, respectively, for the comparable prior year periods.  The decline in revenue and operating incomeis mainly a result of a decrease in license and services revenue as customershave delayed implementation and upgrade requests due to the slow down in theeconomy and until the next version of the software was available at the end ofthe third quarter.

 

The AXSPoint Solutions segment had license fee revenues of $0.1 millionand $0.6 million, respectively, for the three and nine months ended September30, 2001, compared to $0.9 million and $1.7 million, respectively for thecomparable prior year periods; services revenue of $1.2 million and $3.2million, respectively, compared to $1.0 million and $2.6 million, respectivelyfor the comparable prior year periods; and operating income of $0.5 million and$0.7 million, respectively, as compared to $0.9 million and $1.4 million,respectively for the comparable prior year periods.  The decrease in license revenue and operating income for thethree and nine months ended September 30, 2001 is due to the slow down in theeconomy.  The increase in servicesrevenue is mainly attributable to an increase in maintenance fees from theinstalled base and an increase in consulting revenue in the foreign operations.

 

Tivity Solutions had license revenue of $18 thousand and $0.2 million,respectively, for the three and nine months ended September 30, 2001, ascompared to $0.2 million and $0.3 million, respectively for the comparableprior year periods; services revenue of $0.8 million and $2.5 million,respectively, as compared to $0.9 million and $3.1 million, respectively forthe comparable prior year periods, and operating income (loss) of close tobreakeven and $(0.7) million, respectively, as compared to $0.1 million and$0.5 million, respectively for the comparable prior periods.  The decrease in license, services revenueand operating income (loss) for both periods is due to a decline in consultingservices as projects that began in 2000 for two customers ended in early 2001and a general slow down in the economy.

 

**Liquidityand Capital Resources**

 

The available amount under the revolving line of credit at September30, 2001 was approximately $1.6 million. There was no available amount under the term loans at September 30,2001.  (See Note 2 to the ConsolidatedInterim Financial Statements).

 

The Company is required to comply with quarterly and annual financialstatement reporting requirements, as well as certain monthly restrictivefinancial covenants.  The ability tocontinue to borrow under the Agreement is dependent upon future compliance withsuch covenants and available collateral. Management believes that the Company's projected operating results forthe remainder of 2001 will result in compliance under the Agreement, althoughthere can be no assurances that such operating results will be achieved.

 

The Company’s operating activities provided (used) cash of $0.9 millionand $(0.9) million during the nine months ended September 30, 2000 and 2001,respectively. (Subsequent to using cash of $1.6 million for the six monthsended June 30, 2001, the Company's operating activities provided cash of $0.7million for the three months ended September 30, 2001).  Net cash provided by operations during thenine months ended September 30, 2000 was comprised primarily of the net incomeand depreciation and amortization expense, partially offset by a decrease inaccounts payable and accrued expenses. Net cash used in operations during the nine months ended September 30,2001 was comprised primarily of the net loss, partially offset by depreciationand amortization expense, a decrease in accounts receivable, and an increase indeferred revenue.

 

The Company’s investing activities used cash of $2.2 million and $1.2million for the nine months ended September 30, 2000 and 2001,respectively.  The principal uses ofcash during 2000 and 2001 were for equipment purchases, leasehold improvements,and capitalized software development costs. Capitalized software development costs are lower in 2001 as majordevelopment efforts in 2000 for the new line of e-CelleratorÔproducts were completed and released in 2001.

 

Cash provided by financing activities was $1.1 million and $0.7 millionduring the nine months ended September 30, 2000 and 2001, respectively andrelated mainly to proceeds from the issuance of debt in 2001 and repayments ofdebt in 2000 and 2001.  In addition, theCompany received $1.9 million in proceeds from the exercise of stock optionsand warrants for the nine months ended September 30, 2000.

 

The Company has no significant capitalcommitments.  Planned capitalexpenditures for 2001 total approximately $0.7 million of which $0.5 millionhas been expended to date, exclusive of any software development costs that mayqualify for capitalization under SFAS 86. The Company's aggregate minimum operating lease payments for 2001 willbe approximately $2.0 million.  TheCompany has experienced recurring net losses of $9.0 million, $3.7 million and$0.3 million during the years ended December 31, 1998, 1999 and 2000,respectively.  Additionally, as a resultof intense competition and rapid technological change, together with a slowingof the economy, the Company has also experienced declining license and servicerevenues.  In response to theseconditions, management restructured the Company in June 2001 to reduce futurecosts (see Note 5 to the Consolidated Interim Financial Statements) and ispursuing several initiatives intended to improve operating results andliquidity and better position the Company to compete under current marketconditions.  The Company expects that its operating cash flow and availablefinancial resources will be sufficient to fund the Company's working capitalrequirements through 2001 and to repay its outstanding debt in accordance withthe payment terms.  However, theCompany's ability to achieve the anticipated results is affected by the extentof cash generated from operations and the pace at which the Company utilizesits available resources.  Accordingly,the Company may in the future be required to seek additional sources offinancing or future accommodations from its existing lender.  No assurance can be given that management’sinitiatives will be successful or that any such additional sources of financingor lender accommodations will be available.

 

**Item3.    Quantitative and QualitativeDisclosures About Market Risk**

 

In the normal course of business, the Company is exposed tofluctuations in interest rates and equity market risks as the Company seeksdebt and equity capital to sustain its operations.  The Company is also exposed to fluctuations in foreign currencyexchange rates as the financial results of its foreign subsidiaries aretranslated into U.S. dollars in consolidation. The Company does not use derivative instruments or hedging to manage itsexposures and does not currently hold any market risk sensitive instruments fortrading purposes.

 

The information below summarizes the Company’s market risk associatedwith its variable rate debt obligation as of September 30, 2001.  Fair value included herein has beenestimated taking into consideration the nature and term of the debt instrumentsand the prevailing economic and market conditions at the balance sheetdate.  The table below presentsprincipal cash flows by year of maturity based on the terms of the debt.  The variable interest rate disclosedrepresents the rate at September 30, 2001. Changes in the prime interest rate during fiscal 2001 will have apositive or negative effect on the Company’s interest expense.  Each 1% fluctuation in the prime interestrate will increase or decrease annual interest expense for the Company byapproximately $12,000, based on the debt outstanding as of September 30,2001.  Further information specific tothe Company’s debt is presented in Note 2 to the Consolidated Interim FinancialStatements.

 

 

(**Inthousands)**
|            |   | **Variable** |   |           |   |         |   | **Year of Maturity** |   |
|-----------------|--------|--------------|--------|----------------|--------|--------------|--------|----------------------|--------|
|            |   | **Interest** |   | **Estimated**  |   | **Carrying** |   |                 |   |   |   |
| **Description** |   | **Rate**     |   | **Fair Value** |   | **Amount**   |   | **2001**             |   | **2002** |   |
| A Term loan     |   | 7.5          | %      | $1,222         |   | $1,222       |   | $450                 |   | $772 |   |

 

**Certain Factors That May Affect Future Results and FinancialCondition and the Market Price of Securities**

 

See the Company’s 2000Annual Report on Form 10K for a discussion of risk factors.

 

**AXS-ONE INC.**

Part II

Other Information

 

**Item 1.    Legal Proceedings**

 

Historically, the Company has been involved in disputes and/orlitigation encountered in its normal course of business.  The Company believes that the ultimateoutcome of these proceedings will not have a material adverse effect on theCompany's business, consolidated financial condition, results of operations, orcash flows.

 

**Item6.    Exhibits and Reports on Form 8-K**

 

                (a)Exhibits

 

Exhibit 10.1 – Stock Purchase Agreement, dated as ofSeptember 1, 2001, between the Company and Porterfield International Ltd.relating to the sale of all shares of AXS-One Sp. z.o.o. *

 

Exhibit 10.2 – Promissory Note of PorterfieldInternational Ltd. issued to the Company. *

 

*Incorporated by reference to the Exhibits filed withthe Company’s Form 8-K filed on October 5, 2001.

 

                (b) Reports on Form 8-K –

 

On October 5, 2001, the Company filed a Report on Form8-K reporting the sale, on September 20, 2001, of its wholly-owned subsidiarylocated in Warsaw, Poland.

 

 

**AXS-ONE INC.**

 

 

 

**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.

 
|      |              | AXS-ONE INC. |                                                  |
|-----------|-------------------|--------------|-------------------------------------------------------|
|      |              |         |                                                  |   |   |
|      |              |         |                                                  |   |   |
| **Date:** | November 13, 2001 | By:          | :   /s/   John A. Rade            |   |   |
|      |              |         |                                                  |   |   |
|      |              |         | John A. Rade                                          |   |   |
|      |              |         | Chief Executive Officer,                              |   |   |
|      |              |         | President and Director                                |   |   |
|      |              |         |                                                  |   |   |
|      |              |         |                                                  |   |   |
|      |              | By:          | :   /s/   William G. Levering III |   |   |
|      |              |         |                                                  |   |   |
|      |              |         | William G. Levering III                               |   |   |
|      |              |         | Vice President, Chief Financial Officer,              |   |   |
|      |              |         | and Treasurer                                         |   |   |
|      |              |         | (Duly Authorized Officer and                          |   |   |
|      |              |         |   Principal  Financial Officer)                  |   |   |