** **

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

| **For  the quarter ended June 30, 2002** |   | **Commission  File Number** |   | **1-13591** |
|------------------------------------------|--------|-----------------------------|--------|-------------|

 

**AXS-ONE INC.**

(Exactname of registrant as 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 telephone  number, 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 of sharesoutstanding of the issuer’s common stock as of August 5, 2002

 

| **Class**                                |   | **Number of Shares Outstanding** |
|------------------------------------------|--------|----------------------------------|
| Common Stock, par value  $0.01 per share |   | 24,809,742                       |

 

 

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**AXS-ONE INC.**

 

**INDEX**

 
| **PART I**     | **FINANCIAL  INFORMATION**                                                                                             |
|----------------|------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                   |
|           | Item 1.   Financial Statements                                                                                    |
|           |                                                                                                                   |
|           | Consolidated  Balance Sheets (unaudited) December 31, 2001 and June 30, 2002                                           |
|           | Consolidated  Statements of Operations (unaudited) Three and six months ended June 30, 2001  and 2002                  |
|           | Consolidated  Statements of Comprehensive Income (Loss) (unaudited) Three and six months  ended June 30, 2001 and 2002 |
|           | Consolidated Statements  of Cash Flows (unaudited) Six months ended June 30, 2001 and 2002                             |
|           | 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  4.  Submission of Matters to a Vote of  Security Holders                                                    |
|           |                                                                                                                   |
|           | Item 6.  Exhibits and Reports on Form 8-K                                                                         |
|           |                                                                                                                   |
| **SIGNATURES** |
|           |                                                                                                                   |
|           | Signatures                                                                                                             |

 

2

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**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except per share data)**

**(Unaudited)**

** **
|                                                                                                                                                           |   | **December 31,  2001** |       | **June 30,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------|------------|
| **ASSETS**                                                                                                                                                     |   |                   | ** ** |               | ** ** |
| Current assets:                                                                                                                                                |   |                   |       |               |       |
| Cash and cash  equivalents                                                                                                                                     |   | $                      | 1,048      |               | $          | 651 |   |
| Restricted cash                                                                                                                                                |   | 44                     |       | 70                 |       |
| Note receivable  - net of deferred gain on sale of subsidiary of $250 and $180 at December 31,  2001 and June 30, 2002, respectively                           |   | 83                     |       | —             |       |
| Accounts  receivable, net of allowance for doubtful accounts of $657 and $444 at  December 31, 2001 and June 30, 2002, respectively                            |   | 4,544                  |       | 6,396              |       |
| Prepaid expenses  and other current assets                                                                                                                     |   | 469                    |       | 695                |       |
| Total current  assets                                                                                                                                          |   | 6,188                  |       | 7,812              |       |
| Equipment and leasehold  improvements, at cost:                                                                                                                |   |                   |       |               |       |
| Computer and  office equipment                                                                                                                                 |   | 10,392                 |       | 10,496             |       |
| Furniture and  fixtures                                                                                                                                        |   | 952                    |       | 967                |       |
| Leasehold  improvements                                                                                                                                        |   | 1,030                  |       | 1,064              |       |
|                                                                                                                                                           |   | 12,374                 |       | 12,527             |       |
| Less–accumulated  depreciation and amortization                                                                                                           |   | 11,645                 |       | 12,106             |       |
|                                                                                                                                                           |   | 729                    |       | 421                |       |
| Capitalized  software development costs, net of accumulated amortization of $6,815 and  $7,465 at December 31, 2001 and June 30, 2002, respectively            |   | 2,908                  |       | 2,653              |       |
| Investment in  and loans to joint ventures                                                                                                                     |   | 184                    |       | 61                 |       |
| Other assets                                                                                                                                                   |   | 51                     |       | 97                 |       |
|                                                                                                                                                           |   | $                      | 10,060     |               | $          | 11,044 |   |
|                                                                                                                                                           |   |                   |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                                |   |                   |       |               |       |
| Current  liabilities:                                                                                                                                          |   |                   |       |               |       |
| Current portion  of long-term debt                                                                                                                             |   | $                      | 1,800      |               | $          | 2,924 |   |
| Accounts payable                                                                                                                                               |   | 2,202                  |       | 2,137              |       |
| Accrued expenses                                                                                                                                               |   | 4,109                  |       | 3,636              |       |
| Due to joint venture                                                                                                                                           |   | —                 |       | 59                 |       |
| Deferred revenue                                                                                                                                               |   | 8,782                  |       | 9,352              |       |
| Total current  liabilities                                                                                                                                     |   | 16,893                 |       | 18,108             |       |
| Long-term  liabilities:                                                                                                                                        |   |                   |       |               |       |
| Long-term debt,  net of current portion                                                                                                                        |   | 1,347                  |       | 447                |       |
| Commitments and  contingencies                                                                                                                                 |   |                   |       |               |       |
| 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 and 24,804 shares issued and  outstanding at December 31, 2001 and June 30, 2002, respectively |   | 248                    |       | 248                |       |
| Additional  paid-in capital                                                                                                                                    |   | 72,032                 |       | 72,038             |       |
| Accumulated  deficit                                                                                                                                           |   | (80,693                | )          | (80,117            | )          |
| Accumulated  other comprehensive income                                                                                                                        |   | 233                    |       | 320                |       |
| Total  stockholders’ deficit                                                                                                                              |   | (8,180                 | )          | (7,511             | )          |
|                                                                                                                                                           |   | $                      | 10,060     |               | $          | 11,044 |   |

** **

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

**(Unaudited)**

 
|                                                |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                |   | **June 30,2001**        |   | **June 30,2002**      |   | **June 30,2001** |   | **June 30,2002** |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Revenues:                                           |   |                    |   |                  |   |   |   |   |   |
| License fees                                        |   | $                       | 918    |                  | $      | 740 |   | $ | 3,241 |   | $ | 1,924 |   |
| Services                                            |   | 8,748                   |   | 8,522                 |   | 18,294 |   | 16,346 |   |
| Other - related  parties                            |   | 212                     |   | 101                   |   | 242 |   | 189 |   |
| Total revenues                                      |   | 9,878                   |   | 9,363                 |   | 21,777 |   | 18,459 |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Operating  expenses:                                |   |                    |   |                  |   |   |   |   |   |
| Cost of license  fees                               |   | 406                     |   | 337                   |   | 741 |   | 702 |   |
| Cost of services                                    |   | 5,130                   |   | 3,888                 |   | 10,560 |   | 7,695 |   |
| Sales and  marketing                                |   | 3,097                   |   | 1,920                 |   | 6,261 |   | 3,436 |   |
| Research and  development                           |   | 1,832                   |   | 1,710                 |   | 3,731 |   | 3,426 |   |
| General and  administrative                         |   | 3,018                   |   | 1,056                 |   | 5,067 |   | 2,121 |   |
| Restructuring  and other costs                      |   | 1,103                   |   | —                |   | 1,103 |   | — |   |
| Total operating  expenses                           |   | 14,586                  |   | 8,911                 |   | 27,463 |   | 17,380 |   |
| Operating income  (loss)                            |   | (4,708                  | )      | 452                   |   | (5,686 | ) | 1,079 |   |
| Other income  (expense):                            |   |                    |   |                  |   |   |   |   |   |
| Interest income                                     |   | 74                      |   | 10                    |   | 95 |   | 23 |   |
| Interest expense                                    |   | (98                     | )      | (88                   | )      | (202 | ) | (175 | ) |
| Gain on sale of  subsidiary                         |   | —                  |   | 51                    |   | — |   | 70 |   |
| Equity in losses  of joint ventures                 |   | (34                     | )      | (200                  | )      | (74 | ) | (297 | ) |
| Other expense,  net                                 |   | (95                     | )      | (46                   | )      | (166 | ) | (124 | ) |
| Other expense,  net                                 |   | (153                    | )      | (273                  | )      | (347 | ) | (503 | ) |
| Net income  (loss)                                  |   | $                       | (4,861 | )                     | $      | 179 |   | $ | (6,033 | ) | $ | 576 |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Basic net income (loss)  per common share           |   | $                       | (0.20  | )                     | $      | 0.01 |   | $ | (0.24 | ) | $ | 0.02 |   |
| Weighted average basic  common shares outstanding   |   | 24,785                  |   | 24,804                |   | 24,785 |   | 24,798 |   |
| Diluted net income  (loss) per common share         |   | $                       | (0.20  | )                     | $      | 0.01 |   | $ | (0.24 | ) | $ | 0.02 |   |
| Weighted average  diluted common shares outstanding |   | 24,785                  |   | 25,673                |   | 24,785 |   | 25,764 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**(In thousands)**

**(Unaudited)**

 
|                                                        |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                        |   | **2001**                          |   | **2002**                        |   | **2001** |   | **2002** |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Net income (loss)                                           |   | $                                 | (4,861 | )                               | $      | 179 |   | $ | (6,033 | ) | $ | 576 |   |
| Foreign curency translation adjustment                      |   | 47                                |   | 75                              |   | (5 | ) | 87 |   |
| Reclassification adjustment for losses included in net loss |   | 240                               |   | —                          |   | 240 |   | — |   |
| Comprehensive income (loss)                                 |   | $                                 | (4,574 | )                               | $      | 254 |   | $ | (5,798 | ) | $ | 663 |   |

** **

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

** **
|                                                                                       |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                       |   | **2001**                       |   | **2002** |   |
|                                                                                       |   |                           |   |   |   |
| Cash flows from  operating activities:                                                     |   |                           |   |   |   |
| Net income  (loss)                                                                         |   | $                              | (6,033 | ) | $ | 576 |   |
| Adjustments to  reconcile net income (loss) to net cash flows used in operating activities |   |                           |   |   |   |
| Increase in cash  surrender value of officers’ life insurance                         |   | —                         |   | (38 | ) |
| Depreciation and  amortization                                                             |   | 1,036                          |   | 1,019 |   |
| Recovery of  doubtful accounts, net of provisions                                          |   | (106                           | )      | (108 | ) |
| Gain on sale of  subsidiary                                                                |   | —                         |   | (70 | ) |
| Loss on equity  method investments                                                         |   | 74                             |   | 297 |   |
| Loss on disposal  of equipment and leasehold improvements                                  |   | 17                             |   | — |   |
| Non-cash portion  of restructuring and other costs                                         |   | 308                            |   | — |   |
| Non-cash portion  of consulting services                                                   |   | —                         |   | 140 |   |
| Changes in  current assets and liabilities                                                 |   |                           |   |   |   |
| Restricted cash                                                                            |   | —                         |   | (22 | ) |
| Accounts  receivable                                                                       |   | 566                            |   | (1,613 | ) |
| Prepaid expenses  and other current assets                                                 |   | (212                           | )      | (201 | ) |
| Accounts payable  and accrued expenses                                                     |   | 414                            |   | (785 | ) |
| Deferred revenue                                                                           |   | 2,324                          |   | 512 |   |
| Net cash flows  used in operating activities                                               |   | (1,612                         | )      | (293 | ) |
|                                                                                       |   |                           |   |   |   |
| Cash flows from  investing activities:                                                     |   |                           |   |   |   |
| Change in other  assets                                                                    |   | 29                             |   | (6 | ) |
| Proceeds from  sale of subsidiary                                                          |   | —                         |   | 16 |   |
| Loan to joint  venture                                                                     |   | —                         |   | (104 | ) |
| Capitalized  software development costs                                                    |   | (550                           | )      | (395 | ) |
| Purchase of  equipment and leasehold improvements                                          |   | (459                           | )      | (46 | ) |
| Net cash flows  used in investing activities                                               |   | (980                           | )      | (535 | ) |
|                                                                                       |   |                           |   |   |   |
| Cash flows from  financing activities:                                                     |   |                           |   |   |   |
| Proceeds from  exercise of stock options and warrants                                      |   | —                         |   | 6 |   |
| Net borrowings  from revolving line of credit                                              |   | 582                            |   | 1,124 |   |
| Proceeds from  issuance of long-term debt                                                  |   | 1,500                          |   | — |   |
| Payments of  long-term debt and capital lease obligations                                  |   | (875                           | )      | (900 | ) |
| Net cash flows  provided by financing activities                                           |   | 1,207                          |   | 230 |   |
| Foreign currency  exchange rate effects on cash and cash equivalents                       |   | (56                            | )      | 201 |   |
| Net decrease in  cash and cash equivalents                                                 |   | (1,441                         | )      | (397 | ) |
| Cash and cash  equivalents, beginning of period                                            |   | 2,207                          |   | 1,048 |   |
| Cash and cash  equivalents, end of period                                                  |   | $                              | 766    |   | $ | 651 |   |
|                                                                                       |   |                           |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                           |   |   |   |
| Cash paid during  the period for -                                                         |   |                           |   |   |   |
| Interest                                                                                   |   | $                              | 182    |   | $ | 180 |   |
| Income taxes                                                                               |   | $                              | 5      |   | $ | 9 |   |
|                                                                                       |   |                           |   |   |   |
| Non-cash investing  activities -                                                           |   |                           |   |   |   |
| Investment in  joint ventures                                                              |   | $                              | 142    |   | $ | — |   |
|                                                                                       |   |                           |   |   |   |
| Consulting  services received in lieu of payment on note receivable                        |   | $                              | — |   | $ | 140 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

6

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

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

 

**(1)OPERATIONS, BUSINESS CONDITIONS AND SIGNIFICANT 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 for global 2000 businesses, and scheduling and timeand expenses solutions for professional services organizations.  The Company also offers consulting,installation, training and maintenance services in support 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, Central and Eastern Europe(through August 31, 2001 – see Note 7), Singapore, South Africa, and theUnited Kingdom (collectively, the *“Company*”).  During the first quarter of 2001, the Company’s South Africaoperations entered into two joint ventures. Ownership is 50% or less in both entities.  All significant intercompany transactions and balances have beeneliminated.  The Company uses the equitymethod of accounting for its joint ventures that it owns between 20 and 50percent.  Under the equity method,investments are stated at cost plus or minus the Company’s equity inundistributed earnings or losses.

 

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 2001 Annual Report on Form 10-K filed with the Securities andExchange Commission.

 

The results of operations for the six-month period ended June 30, 2002are not necessarily indicative of results to be expected for any futureperiods.

 

(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 maintenance, which is recognized on a straight-line basis over theinitial maintenance term.  The VSOE ofmaintenance is determined by using a consistent percentage of maintenance feeto license fee.  Maintenance fees insubsequent years are recognized on a straight-line basis over the life of theapplicable agreement.  Delivery ofsoftware generally occurs when the product (on CDs) is delivered to a commoncarrier.

 

The majority of the Company’s training and consulting services arebilled based on hourly rates.  TheCompany generally recognizes revenue as these services are performed.  However, when the Company enters into anarrangement that requires it to perform significant work either to alter theunderlying software or to build additional complex interfaces so that thesoftware performs as the customer requests, the Company recognizes the entirefee using contract accounting.  Thiswould apply to the Company’s custom programming services which are generallycontracted on a fixed fee basis.

 

7

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

Revenues from joint ventures (included in Revenues: Other-RelatedParties in the Company’s Consolidated Statements of Operations) includesconsulting revenue for the joint ventures’ use of the Company’s South Africansubsidiary’s consultants and for management fees for the Company’s subsidiaryproviding managerial, technical and other related services to the jointventures in accordance with the joint venture agreements.  Revenue is recognized upon performance ofthe services.

 

For all the Company’s revenue transactions, the Company assesseswhether the fee is fixed and determinable and whether or not collection isreasonably assured.  The Companyassesses whether the fee is fixed and determinable based on the payment termsassociated with the transaction.  If asignificant portion of a fee is due after the Company’s normal payment terms,which are 30 to 90 days from invoice date, it accounts for the fee as not beingfixed and determinable.  In these cases,the Company recognizes revenue as the fees become due.

 

The Company assesses assuredness of collection based on a number offactors, including past transaction history with the customer and thecredit-worthiness of the customer.  TheCompany does not request collateral from its customers.  If the Company determines that collection ofa fee is not reasonably assured, it defers the fee and recognizes revenue atthe time collection becomes reasonably assured, which is generally upon receiptof cash.  Anticipated losses, if any,are charged to operations in the period such losses are determined.

 

In November 2001, the FASB EITF reached a consensus to issue a FASBStaff Announcement Topic No. D-103 (re-characterized in January 2002 as EITFIssue No. 01-14), “Income Statement Characterization of Reimbursement Receivedfor ‘Out-of-Pocket’ Expenses Incurred” which clarifies that reimbursementsreceived for out-of-pocket expenses incurred should be characterized as revenuein the statement of operations.  Thisconsensus should be applied in financial reporting periods beginning afterDecember 15, 2001.  Upon application ofthis consensus, comparative financial statements for prior periods should be reclassifiedto comply with the guidance in this consensus. For the three and six months ended June 30, 2001, the adoption of theconsensus resulted in a reclassification to services revenue and cost ofservices of $0.3 million and $0.6 million, respectively.

 

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

 

On March 31, 1998, the Company entered into a Loan and SecurityAgreement (“Agreement”) which contained a revolving line of credit and a termloan (the “Initial Term Loan”).

 

Borrowings under the revolving line of credit bear annual interest atprime rate plus 1.25% subject to a minimum interest rate of 8.0% perannum.  The Agreement provides foryearly 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 remaining amountavailable under the revolving line of credit at June 30, 2002 was approximately$0.1 million.

 

The Initial Term Loan provided for $5 million available in one drawdownwhich the Company borrowed on the closing date in 1998.  The Initial Term Loan bears interest at theprime rate as defined (4.75% per annum at June 30, 2002) plus 1.5% subject to aminimum interest rate of 8.0% per annum.

 

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,

 

8

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

of which the Company borrowed $500 on November 3, 2000 and requestedthe remaining $250 on December 31, 2000 which was subsequently remitted andrecorded on the Company’s books on January 2, 2001.

The A Term Loan bears interest at the rate of prime as defined (4.75%per annum at June 30, 2002) plus 1.5% subject to a minimum interest rate of8.0% per annum.  The B Term Loan bearsinterest at the fixed rate of 12.0% per annum.

 

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 only $750 on April 30, 2001 and $500 onMay 30, 2001, to extend the termination date of the credit facility to March31, 2004 and to establish restrictive financial covenants for 2001.  The availability of the Additional B TermLoan was subject to the Company’s compliance with the 2001 financial covenants.

 

On June 29, 2001, the Company further amended the Agreement (AmendmentNo. 10) to make available an additional term loan (the “Second Additional BTerm Loan”) in the original principal amount of $500 which was borrowed on July31, 2001, to eliminate the financial covenant requirement for June 30, 2001,and to set two new monthly covenants for the remainder of 2001 based on EBITDA(earnings before interest, taxes and depreciation and amortization) and minimumrevenue requirements.  The Company wasin compliance with these new monthly covenants through December 31, 2001.

 

On March 13, 2002, the Company further amended the Agreement (AmendmentNo. 11) to set new financial covenants for the year 2002 based on EBITDA.  The Company was in compliance with these newcovenants through June 30, 2002.

 

Effective August 8, 2002, the Company further amended the Agreement(Amendment No. 12) in order to make available an additional term loan (the“Third Additional B Term Loan”) in the original principal amount of up to $1.5million and to revise the Amendment No. 11 EBITDA covenant for theremainder of 2002.

 

The aggregate outstanding principal amount of the Term Loans isrepayable in monthly installments of $150 beginning September, 2002 over theremaining term of the Loan and Security Agreement, in accordance with AmendmentNo. 12. Any unpaid principal and interest is due in full on March 31,2004.

 

Amendment No. 12 provides a limitation that if the total outstandingbalance of the Term Loans exceeds at any time the lesser of (i) 40% of eligiblemaintenance revenues from August 8, 2002 through December 31, 2002, 25% ofeligible maintenance revenues from January 1, 2003 through March 31, 2004 and(ii) $4.5 million, then the Company is required to prepay the principal amountin an amount sufficient to cause the aggregate principal amount of the TermLoans to be less than or equal to the relevant limits set forth above.  As of June 30, 2002, eligible maintenancerevenues as defined, totaled approximately $12.0 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 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 theirclients.  Under the Company’scertificate of incorporation, and Delaware law, the Company has anindemnification obligation to

 

9

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

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 estimated legal fees were recorded in general andadministrative expenses during the year ended December 31, 2001.  During the second quarter of 2002,approximately $0.3 million of these charges were reversed due to favorablesettlements of outstanding billings with legal firms.  The Company does not anticipate any further costs relating tothis matter.

 

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) PER COMMON 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 three and six months ended June30, 2001 since the effect of stock options and warrants is anti-dilutive.  Diluted net loss per common share for thethree and six months ended June 30, 2001 does not include the effects ofoutstanding options to purchase 4,937 shares of common stock, and outstandingwarrants to purchase 476 shares of common stock, as the effect of their inclusionis anti-dilutive for the periods. Diluted net income per common share for the three and six months endedJune 30, 2002 does not include the effects of outstanding options to purchase3,612 and 3,570, respectively, shares of common stock and outstanding warrantsto purchase 476 shares of common stock for each period as the effect of theirinclusion is anti-dilutive for the periods.

 

The following represents the calculations of the basic and diluted netincome (loss) per common share for the three and six months ended June 30, 2001and 2002.

 
|                                                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                   |   | **2001**                          |   | **2002**                        |   | **2001** |   | **2002** |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                                                     |   | $                                 | (4,861 | )                               | $      | 179 |   | $ | (6,033 | ) | $ | 576 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Weighted average  basic common shares outstanding during the periods   |   | 24,785                            |   | 24,804                          |   | 24,785 |   | 24,798 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Effect of dilutive securities:                                         |   |                              |   |                            |   |   |   |   |   |
| Stock options and warrants                                             |   | —                            |   | 869                             |   | — |   | 966 |   |
| Weighted average diluted common shares outstanding  during the periods |   | 24,785                            |   | 25,673                          |   | 24,785 |   | 25,764 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Basic net income  (loss) per common share                              |   | $                                 | (0.20  | )                               | $      | 0.01 |   | $ | (0.24 | ) | $ | 0.02 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Diluted net  income (loss) per common share                            |   | $                                 | (0.20  | )                               | $      | 0.01 |   | $ | (0.24 | ) | $ | 0.02 |   |

 

**(5) 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.  In addition, in certain foreign locations,

 

10

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

the Company eliminated eight positions, wrote-offcertain non-performing assets and cumulative foreign currency translationadjustment and recorded a charge for remaining leases.  The Company recorded a charge to operationsin the second quarter of 2001 totaling approximately $1.1 million for theseitems, reflecting approximately $0.6 million in termination costs of thosepersonnel as well as $0.3 million in asset and cumulative foreign currencytranslation adjustment write-offs and $0.2 million in lease costs.  During the third and fourth quarters of 2001,the Company adjusted downward the charge to operations by approximately $(0.2)million and $(0.1) million respectively, reflecting revised termination andlease costs.  These revisionsresulted from the Company’s decision to retain certain employees in one of theforeign locations to develop software enhancements for the Tivity Solutionssegment.  The activity related to this restructuring is as follows:

 
|                                                                        |   | **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 |   |
| Write-off of  assets and cumulative foreign currency translation adjustment |   | —                           |   | (300                                                                              | )      | —           |   | (300             | )      |
| Revision of the  restructuring costs in September 2001                      |   | (138                             | )      | —                                                                            |   | (28              | )      | (166             | )      |
| Revision of the  restructuring costs in December 2001                       |   | —                           |   | —                                                                            |   | (140             | )      | (140             | )      |
| Cash payments  through March 31, 2002                                       |   | (465                             | )      | —                                                                            |   | (32              | )      | (497             | )      |
| Restructuring  liability at June 30, 2002                                   |   | $                                | — |                                                                              | $      | —           |   | $                | — |   | $ | — |   |

 

**(6) ****OPERATING SEGMENTS**

 

The Company is organized into three separate business segments based onproducts it offers to specific markets as part of its strategy to focus onmarket opportunities.  The threebusiness segments are as follows:

 

a)              The AXS-OneEnterprise Solutions segment is focused on marketing Enterprise Solutions toglobal 2000 companies.  AXS-OneEnterprise Solutions is also responsible for servicing and managing theCompany’s extensive installed base of customers.  Enterprise Solutions enable organizations to achieve processtransparency throughout their value chain.

 

b)             The AXSPointSolutions segment is focused on identifying markets that need to rapidlyleverage the Internet in communicating, exchanging or reconciling large volumesof knowledge with their customers, suppliers and partners.  The AXSPoint Solutions segment targets largeinformation-centric organizations that can utilize self-service informationsystems to improve communications with their customers and improve access tobusiness intelligence.

 

c)              The Tivity Solutionssegment has been chartered with delivering a full suite of business solutionsand services to organizations that primarily sell professionals’ time.

 

The significant accounting policies of the reportable segments are thesame as those described in Note 1 of Notes to Consolidated Interim FinancialStatements.  The Company evaluates theperformance of its operating segments based on revenues and operating income(loss).  Inter-segment sales andtransfers are not significant.

 

11

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

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  Solutions** |   | **AXSPoint  Solutions** |   | **Tivity  Solutions** |   | **Total** |   |
|--------------------------------------|--------|------------------------------------|--------|-------------------------|--------|-----------------------|--------|-----------|--------|
|                                 |   |                               |   |                    |   |                  |   |      |   |
| **Three Months Ended June 30, 2001** |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                            |   |                               |   |                    |   |                  |   |      |   |
| License fees                         |   | $                                  | 555    |                    | $      | 214                   |   | $         | 149    |   | $ | 918 |   |
| Services                             |   | 7,062                              |   | 1,003                   |   | 683                   |   | 8,748     |   |
| Total Revenues                       |   | 7,617                              |   | 1,217                   |   | 832                   |   | 9,666     |   |
| Operating loss                       |   | (1,166                             | )      | (59                     | )      | (540                  | )      | (1,765    | )      |
| Total assets                         |   | 11,179                             |   | 1,028                   |   | 943                   |   | 13,150    |   |
| Capital  expenditures                |   | 140                                |   | 15                      |   | 17                    |   | 172       |   |
| Depreciation and  amortization       |   | 456                                |   | 21                      |   | 35                    |   | 512       |   |
|                                 |   |                               |   |                    |   |                  |   |      |   |
| **Three Months Ended June 30, 2002** |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                            |   |                               |   |                    |   |                  |   |      |   |
| License fees                         |   | $                                  | 361    |                    | $      | 370                   |   | $         | 9      |   | $ | 740 |   |
| Services                             |   | 6,846                              |   | 1,045                   |   | 631                   |   | 8,522     |   |
| Total Revenues                       |   | 7,207                              |   | 1,415                   |   | 640                   |   | 9,262     |   |
| Operating income (loss)              |   | 860                                |   | 777                     |   | (81                   | )      | 1,556     |   |
| Total assets                         |   | 8,995                              |   | 1,396                   |   | 653                   |   | 11,044    |   |
| Capital  expenditures                |   | 27                                 |   | 2                       |   | 3                     |   | 32        |   |
| Depreciation and  amortization       |   | 477                                |   | 7                       |   | 13                    |   | 497       |   |
|                                 |   |                               |   |                    |   |                  |   |      |   |
| **Six Months Ended June 30, 2001**   |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                            |   |                               |   |                    |   |                  |   |      |   |
| License fees                         |   | $                                  | 2,569  |                    | $      | 472                   |   | $         | 200    |   | $ | 3,241 |   |
| Services                             |   | 14,510                             |   | 2,026                   |   | 1,758                 |   | 18,294    |   |
| Total Revenues                       |   | 17,079                             |   | 2,498                   |   | 1,958                 |   | 21,535    |   |
| Operating income (loss)              |   | 73                                 |   | 128                     |   | (773                  | )      | (572      | )      |
| Total assets                         |   | 11,179                             |   | 1,028                   |   | 943                   |   | 13,150    |   |
| Capital  expenditures                |   | 387                                |   | 35                      |   | 37                    |   | 459       |   |
| Depreciation and  amortization       |   | 931                                |   | 39                      |   | 66                    |   | 1,036     |   |
|                                 |   |                               |   |                    |   |                  |   |      |   |
| **Six Months Ended June 30, 2002**   |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                            |   |                               |   |                    |   |                  |   |      |   |
| License fees                         |   | $                                  | 897    |                    | $      | 764                   |   | $         | 263    |   | $ | 1,924 |   |
| Services                             |   | 12,961                             |   | 2,150                   |   | 1,235                 |   | 16,346    |   |
| Total Revenues                       |   | 13,858                             |   | 2,914                   |   | 1,498                 |   | 18,270    |   |
| Operating income                     |   | 1,684                              |   | 1,598                   |   | 2                     |   | 3,284     |   |
| Total assets                         |   | 8,995                              |   | 1,396                   |   | 653                   |   | 11,044    |   |
| Capital  expenditures                |   | 38                                 |   | 4                       |   | 4                     |   | 46        |   |
| Depreciation and  amortization       |   | 957                                |   | 30                      |   | 32                    |   | 1,019     |   |

 

Reconciliation of total segment operating income to consolidatedoperating income (loss):

 
|                                              |   | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30** | ** ** |
|---------------------------------------------------|--------|---------------------------------|------------|------------------------------|------------|
|                                              |   | **2001**                        |       | **2002**                     |       | **2001** |   | **2002** |   |
| Operating income  (loss) from reportable segments |   | $                               | (1,765     | )                            | $          | 1,556 |   | $ | (572 | ) | $ | 3,284 |   |
| Unallocated  revenue, other –related parties |   | 212                             |       | 101                          |       | 242 |   | 189 |   |
| Unallocated  general and administrative expense   |   | (2,952                          | )          | (1,071                       | )          | (4,925 | ) | (2,084 | ) |
| Other corporate  unallocated expenses             |   | (203                            | )          | (134                         | )          | (431 | ) | (310 | ) |
| Total  consolidated operating income (loss)       |   | $                               | (4,708     | )                            | $          | 452 |   | $ | (5,686 | ) | $ | 1,079 |   |

 

12

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIMFINANCIAL STATEMENTS (continued)**

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

 

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

 

On September 20, 2001, the Company sold its wholly-owned subsidiarylocated in Central and Eastern Europe (C.E.E.), including offices in Poland,Estonia and Bulgaria, to Porterfield International Ltd. (“Buyer”), a companywholly-owned by the former managing director of C.E.E. and his wife.  The Company received consideration in theform of a promissory note of Buyer in the face amount of $430.  The note is payable either in cash or, if werequest, an equivalent dollar amount of professional services in 15 monthlyinstallments ending on December 1, 2002 and bears interest at the fixed rate of6.75% per year.  A net asset deficiencyof the C.E.E. operations of $(3), at the time of the sale, offset by accruedexpenses of $180, directly related to the sale, resulted in a deferred gain ofapproximately $253, which the Company recorded in accordance with theSecurities and Exchange Commission’s Staff Accounting Bulletin No. 81 (SAB 81),“Gain Recognition on the Sale of a Business or Operating Assets to a HighlyLeveraged Entity.”  An additionalexpense of $3 was recorded during the three months ended June 30, 2002resulting in a net deferred gain of $250. In accordance with SAB 81, the Company presented, in the accompanyingconsolidated balance sheet, the deferred gain as an offset to the notereceivable.  The Company recognizes suchgain as the note receivable is paid or equivalent value for services isreceived, but only after $180 is received. As of June 30, 2002, the Company has received $250 in payments and/orequivalent services and recognized $70 of such gain.

 

The following table sets forth significant financial data of theCentral and Eastern Europe subsidiary prior to its disposition included in theconsolidated results of operations for the three and six months ended June 30,2001:

** **
|                      |   | **Three  Months EndedJune 30, 2001** |   | **Six Months  EndedJune 30, 2001** |   |
|---------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
| Revenues:                 |   |                                 |   |                               |   |
| License fees              |   | $                                    | 103    |                               | $      | 205 |   |
| Services                  |   | 478                                  |   | 937                                |   |
| Total revenues            |   | 581                                  |   | 1,142                              |   |
|                      |   |                                 |   |                               |   |
| Total operating  expenses |   | 731                                  |   | 1,296                              |   |
| Operating loss            |   | (150                                 | )      | (154                               | )      |
| Other income,  net        |   | 60                                   |   | 43                                 |   |
| Net loss                  |   | $                                    | (90    | )                                  | $      | (111 | ) |

 

13

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**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 AXS-One.  Investors arecautioned that such statements are only predictions and that actual events orresults 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 our 2001 Annual Report onForm 10K.

 

**Overview**

 

We are a provider of e-Business solutions for global 2000 companies,professional service organizations (PSOs) and financial managers who haveimplemented high-volume, scalable and secure business solutions for hundreds ofcustomers across the globe.

 

We supply a suite of e-commerce solutions based upon our nextgeneration n-tier Internet-architecture. This family of products, e-Celleratoräproducts, 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-Oneä Enterprise solutions and AXSPointÒsolutions.  AXS-One Enterprise solutionsare designed to enable businesses to conduct business transactions across theInternet.  AXSPoint solutions aredesigned to enable organizations to distribute and manage information andcontent across the Internet.  These twofamilies of solutions were announced in the fourth quarter of 1999, and AXS-OneEnterprise solutions and AXSPoint solutions modules were made availablethroughout 2000 and 2001.  See “Item1.  Business” in our 2001 Annual Reporton Form 10K.

 

We have experienced, and may in the future experience, significantfluctuations in our quarterly and annual revenues, results of operations andcash flows.  We believe that domesticand international operating results and cash flows will continue to fluctuatesignificantly in the future as a result of a variety of factors, including thetiming of revenue recognition related to significant license agreements, thelengthy sales cycle for our products, the proportion of revenues attributableto license fees versus services, the utilization of third parties to performservices, the amount of revenue generated by resales of third party software,changes in product mix, demand for our products, the size and timing ofindividual license transactions, the introduction of new products and productenhancements by us or our competitors, changes in customers’ budgets, competitiveconditions in the industry and general economic conditions.  For a description of certain factors thatmay affect our operating results, see “Business—Risk Factors” in our 2001 Annual Report on Form 10K.

 

We incurred net losses of $3.7 million, $0.3 million and $4.7 millionin 1999, 2000 and 2001, respectively, and operating losses of $1.2 million,$0.2 million and $4.1 million in 1999, 2000 and 2001, respectively.  Operating losses incurred by our French andGerman subsidiaries, which were sold in 1999, totaled $2.4 million for1999.  The 1999 net loss includes a $2.2million loss on sales of subsidiaries. Operating losses incurred by the Central and Eastern Europe subsidiary,which was sold in 2001 totaled $1.0 million, $0.6 million and $0.3 million for1999, 2000 and 2001, respectively.  Wereported net income of $0.2 million and $0.6 million for the three and sixmonths ended June 30, 2002, respectively, and operating income of $0.5 and $1.1million, respectively, for the same periods.

 

 

14

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**NewAccounting Standards**

 

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-livedassets.  This statement supersedesStatement No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed of.” The adoption of SFAS 144 was required beginning January 1, 2002.  We do not believe the adoption of SFAS No.144 will have a material effect on our consolidated financial position orresults of operations.

 

In November 2001, the FASB EITF reached a consensus to issue a FASBStaff Announcement Topic No. D-103 (re-characterized in January 2002 as EITFIssue No. 01-14), “Income Statement Characterization of Reimbursement Receivedfor ‘Out-of-Pocket’ Expenses Incurred” which clarifies that reimbursementsreceived for out-of-pocket expenses incurred should be characterized as revenuein the statement of operations.  Thisconsensus should be applied in financial reporting periods beginning afterDecember 15, 2001.  Upon application ofthis consensus, comparative financial statements for prior periods should bereclassified to comply with the guidance in this consensus.  The adoption of this consensus on January 1,2002 resulted in an increase to services revenue and cost of services of $0.3million and $0.6 million for the three and six months ended June 30, 2001,respectively.  There was no effect oneither our consolidated operating income (loss) or net income (loss).

 

In July 2002, the FASB issued Statement No. 146(SFAS 146), “Accounting for Costs Associated with Exit or DisposalActivities.”  This Standard supercedes theaccounting guidance provided by Emerging Issues Task Force Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity” (including “Certain Costs Incurred in aRestructuring”).  SFAS No. 146 requirescompanies to recognize costs associated with exit activities when they areincurred rather than at the date of a commitment to an exit or disposalplan.  SFAS No. 146 is to be appliedprospectively to exit or disposal activities initiated after December 31,2002.  The Company is currentlyevaluating this Standard.

 

**EuroCurrency**

 

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 were issued. The prior local currencies were withdrawn from circulation on July 1,2002.  We derived approximately 34.5% ofour total revenues outside the United States for 2001, a significant portion ofwhich was in Europe.  Excluding oursubsidiary in Central and Eastern Europe which was sold in 2001 (See Note 7 tothe Consolidated Interim Financial Statements), we derived approximately 31.9%of our total revenues outside the United States for 2001.  We derived approximately 29.9 % of our totalrevenues outside the United States for the six months ended June 30, 2002.  The euro conversion did not have a materialeffect on our consolidated financial position or results of operations.

 

15

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**Resultsof Operations**

 

The following table sets forth for the periodsindicated, certain operating data, and data as a percentage of total revenuesboth including and excluding the Central and Eastern Europe (C.E.E.) subsidiary(including offices in Poland, Bulgaria and Estonia) sold in 2001:

 
|                                |   | **Three  Months Ended June 30, 2001** |       | **Three  Months Ended  June 30, 2002** |   |
|-------------------------------------|--------|---------------------------------------|------------|----------------------------------------|--------|
| **(in  thousands)**                 |   | **As  Reported**                      |       | **C.E.E.**                             |   | **Excluding  C.E.E.** |   | **Data as a  percent of  revenue** |   | **As  Reported** |   | **Data as a  percent of  revenue** |   |
|                                |   | **(Unaudited)**                       | ** ** | **(Unaudited)**                        |   |
| Revenues:                           |   |                                  |       |                                   |   |   |   |   |   |   |   |   |   |
| License fees                        |   | $                                     | 918        |                                   | $      | 103 |   | $ | 815 |   | 8.8 | % | $ | 740 |   | 7.9 | % |
| Services                            |   | 8,748                                 |       | 478                                    |   | 8,270 |   | 88.9 |   | 8,522 |   | 91.0 |   |
| Other-related  parties              |   | 212                                   |       | —                                 |   | 212 |   | 2.3 |   | 101 |   | 1.1 |   |
| Total revenues                      |   | 9,878                                 |       | 581                                    |   | 9,297 |   | 100.0 |   | 9,363 |   | 100.0 |   |
|                                |   |                                  |       |                                   |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                |   |                                  |       |                                   |   |   |   |   |   |   |   |   |   |
| Cost of license  fees               |   | 406                                   |       | 24                                     |   | 382 |   | 4.1 |   | 337 |   | 3.6 |   |
| Cost of services                    |   | 5,130                                 |       | 287                                    |   | 4,843 |   | 52.1 |   | 3,888 |   | 41.5 |   |
| Sales and  marketing                |   | 3,097                                 |       | 127                                    |   | 2,970 |   | 31.9 |   | 1,920 |   | 20.5 |   |
| Research and  development           |   | 1,832                                 |       | —                                 |   | 1,832 |   | 19.7 |   | 1,710 |   | 18.3 |   |
| General and  administrative         |   | 3,018                                 |       | 293                                    |   | 2,725 |   | 29.3 |   | 1,056 |   | 11.3 |   |
| Restructuring  and other costs      |   | 1,103                                 |       | —                                 |   | 1,103 |   | 11.9 |   | — |   | — |   |
| Total operating  expenses           |   | 14,586                                |       | 731                                    |   | 13,855 |   | 149.0 |   | 8,911 |   | 95.2 |   |
| Operating income  (loss)            |   | (4,708                                | )          | (150                                   | )      | (4,558 | ) | (49.0 | ) | 452 |   | 4.8 |   |
| Other income  (expense):            |   |                                  |       |                                   |   |   |   |   |   |   |   |   |   |
| Interest income                     |   | 74                                    |       | 68                                     |   | 6 |   | 0.1 |   | 10 |   | 0.1 |   |
| Interest expense                    |   | (98                                   | )          | (8                                     | )      | (90 | ) | (1.0 | ) | (88 | ) | (0.9 | ) |
| Gain on sale of  subsidiary         |   | —                                |       | —                                 |   | — |   | — |   | 51 |   | 0.5 |   |
| Equity in losses  in joint ventures |   | (34                                   | )          | —                                 |   | (34 | ) | (0.4 | ) | (200 | ) | (2.1 | ) |
| Other income  (expense), net        |   | (95                                   | )          | —                                 |   | (95 | ) | (1.0 | ) | (46 | ) | (0.5 | ) |
| Other income  (expense), net        |   | (153                                  | )          | 60                                     |   | (213 | ) | (2.3 | ) | (273 | ) | (2.9 | ) |
| Net income  (loss)                  |   | $                                     | (4,861     | )                                      | $      | (90 | ) | $ | (4,771 | ) | (51.3 | )% | $ | 179 |   | 1.9 | % |

 

16

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|                                |   | **Six Months  Ended June 30, 2001** |   | **Six Months  Ended  June 30, 2002** |   |
|-------------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|
| **(in  thousands)**                 |   | **As  Reported**                    |   | **C.E.E.**                           |   | **Excluding  C.E.E.** |   | **Data as a  percent of  revenue** |   | **As  Reported** |   | **Data as a  percent of  revenue** |   |
|                                |   | **(Unaudited)**                     |   | **(Unaudited)**                      |   |
| Revenues:                           |   |                                |   |                                 |   |   |   |   |   |   |   |   |   |
| License fees                        |   | $                                   | 3,241  |                                 | $      | 205 |   | $ | 3,036 |   | 14.7 | % | $ | 1,924 |   | 10.4 | % |
| Services                            |   | 18,294                              |   | 937                                  |   | 17,357 |   | 84.1 |   | 16,346 |   | 88.6 |   |
| Other-related  parties              |   | 242                                 |   | —                               |   | 242 |   | 1.2 |   | 189 |   | 1.0 |   |
| Total revenues                      |   | 21,777                              |   | 1,142                                |   | 20,635 |   | 100.0 |   | 18,459 |   | 100.0 |   |
|                                |   |                                |   |                                 |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                |   |                                |   |                                 |   |   |   |   |   |   |   |   |   |
| Cost of license  fees               |   | 741                                 |   | 72                                   |   | 669 |   | 3.2 |   | 702 |   | 3.8 |   |
| Cost of services                    |   | 10,560                              |   | 574                                  |   | 9,986 |   | 48.4 |   | 7,695 |   | 41.7 |   |
| Sales and  marketing                |   | 6,261                               |   | 363                                  |   | 5,898 |   | 28.6 |   | 3,436 |   | 18.6 |   |
| Research and  development           |   | 3,731                               |   | —                               |   | 3,731 |   | 18.1 |   | 3,426 |   | 18.6 |   |
| General and  administrative         |   | 5,067                               |   | 287                                  |   | 4,780 |   | 23.2 |   | 2,121 |   | 11.5 |   |
| Restructuring  and other costs      |   | 1,103                               |   | —                               |   | 1,103 |   | 5.3 |   | — |   | — |   |
| Total operating expenses            |   | 27,463                              |   | 1,296                                |   | 26,167 |   | 126.8 |   | 17,380 |   | 94.2 |   |
| Operating income  (loss)            |   | (5,686                              | )      | (154                                 | )      | (5,532 | ) | (26.8 | ) | 1,079 |   | 5.8 |   |
| Other income  (expense):            |   |                                |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest income                     |   | 95                                  |   | 69                                   |   | 26 |   | 0.1 |   | 23 |   | 0.1 |   |
| Interest expense                    |   | (202                                | )      | (26                                  | )      | (176 | ) | (0.8 | ) | (175 | ) | (0.9 | ) |
| Gain on sale of  subsidiary         |   | —                              |   | —                               |   | — |   | — |   | 70 |   | 0.4 |   |
| Equity in losses  in joint ventures |   | (74                                 | )      | —                               |   | (74 | ) | (0.4 | ) | (297 | ) | (1.6 | ) |
| Other income  (expense), net        |   | (166                                | )      | —                               |   | (166 | ) | (0.8 | ) | (124 | ) | (0.7 | ) |
| Other income  (expense), net        |   | (347                                | )      | 43                                   |   | (390 | ) | (1.9 | ) | (503 | ) | (2.7 | ) |
| Net income  (loss)                  |   | $                                   | (6,033 | )                                    | $      | (111 | ) | $ | (5,922 | ) | (28.7 | )% | $ | 576 |   | 3.1 | % |

 

**Note:  **The following discussionsrelate to changes in the results of operations excluding C.E.E. for the periodspresented.

 

**Total Revenues**

 

Total revenues increased $0.1 million or 0.7% and decreased $2.2million or 10.5% for the three and six months ended June 30, 2002,respectively, as compared to the corresponding prior year periods.  The increase for the three month period is mainlythe result of a $0.3 million increase in service revenues partially offset by a$0.1 million decrease in both license fees and other-related partiesrevenues.  The decrease for the sixmonth period is mainly attributable to a decrease of $0.4 million in licensefees and $0.6 million in service revenues in the U.S. operations, and adecrease of $0.8 million in revenues in our foreign subsidiaries.  This was primarily the result of a slow downin the economy, the effects of which are being felt throughout the softwareindustry and increased competition in the services industry.

 

We derived approximately $2.8 million and $5.3 million, or 30.6% and29.9%, of our total revenues from customers outside of the United States forthe three and six months ended June 30, 2002, respectively, compared to $3.2million and $6.4 million, or 35.9% and 32.0%, respectively, for thecorresponding prior year periods.  Weexpect that such revenues will continue to represent a significant percentageof our total revenues in the future. Most of our international license fees and service revenues aredenominated in foreign currencies. Future fluctuations in the value of foreign currencies relative to theU.S. dollar in the future could result in fluctuations in our revenue.

 

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***License Fees***

 

License fees include revenues from software license agreements weentered into with our customers with respect to both our products and, to alesser degree, third party products resold by us.  Total license fees decreased $0.1 million and $1.1 million or9.2% and 36.6% for the three and six months ended June 30, 2002, respectively,as compared to the comparable prior year periods.  The decrease is mainly as a result of the absence of a large licensecontract from one customer as noted below. License fees for the three months ended June 30, 2002 included $0.3million or 44.6% of total license fees from two customers.  License fees for the six months ended June30, 2002 included $0.6 million or 31.2% of total license fees from two customers.  License fees for the six months ended June30, 2001 included $1.2 million or 38.3% of total license fees from onecustomer.

 

***Service Revenues***

 

Service revenues include fees from software maintenance agreements,training, consulting services, including installation, and customprogramming.  Maintenance fees,including first year maintenance, which is allocated from the total licensearrangements based on VSOE, are recognized ratably over the period of the maintenanceagreement.  Training, consulting, andcustom programming revenues are recognized as the services are performed.

 

Service revenues increased $0.3 million or 3.0% for the three monthsended June 30, 2002 and decreased $1.0 million or 5.8% for the six months endedJune 30, 2002 as compared to the comparable prior year periods. The decreasefor the six month period partially relates to a $0.4 million decrease inconsulting revenue resulting from fewer demands for upgrades in the installedbase during the first quarter of 2002, thereby requiring less implementationservices.  The decrease is also a resultof a $0.5 million decrease in maintenance revenues.  Maintenance revenues for the six months ended June 30, 2001 werehigher than for the first half of 2002 because they included revenues from customersrelated to prior year negotiated settlements and from incremental maintenancefor continued support of older versions of our software no longer supportedunder current maintenance agreements. The increase for the three month period ended June 30, 2002 is mainlythe result of an increase in consulting revenue resulting from greater demandsfor upgrades in the installed base during this period.

 

The following table sets forth, for the periods indicated, each majorcategory of our service revenues as a percent of total service revenues:

 
|                   |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(in  thousands)**    |   | **2001(a)**                      |   | **2002**                       |   | **2001(a)** |   | **2002** |   |
|                   |   | **Amount**                       |   | **%****of  Total**             |   | **Amount** |   | **%****of  Total** |   | **Amount** |   | **%****of  Total** |   | **Amount** |   | **%****of  Total** |   |
| Maintenance            |   | $                                | 4,022  |                           | 48.6   | % | $ | 3,946 |   | 46.3 | % | $ | 8,312 |   | 47.9 | % | $ | 7,825 |   | 47.9 | % |
| Consulting             |   | 4,081                            |   | 49.4                           | %      | 4,459 |   | 52.3 | % | 8,730 |   | 50.3 | % | 8,321 |   | 50.9 | % |
| Training               |   | 68                               |   | 0.8                            | %      | 27 |   | 0.3 | % | 114 |   | 0.7 | % | 57 |   | 0.3 | % |
| Custom programming     |   | 99                               |   | 1.2                            | %      | 90 |   | 1.1 | % | 201 |   | 1.1 | % | 143 |   | 0.9 | % |
| Total services revenue |   | $                                | 8,270  |                           | 100.0  | % | $ | 8,522 |   | 100.0 | % | $ | 17,357 |   | 100.0 | % | $ | 16,346 |   | 100.0 | % |

 

(a) Excluding C.E.E.

 

 

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***Other – Related Parties***

 

During January 2001, we entered into two South African joint ventures:AXS-One African Solutions (Pty) Ltd (“African Solutions”) and HospitalityWarehouse (Pty) Ltd (“Hospitality Warehouse”). African Solutions sells and services our suite of products.  Hospitality Warehouse uses our procurementsoftware and generates fees for purchases made by member companies in thehospitality industry.  Ownership is 50%or less in each joint venture.  We usethe equity method of accounting for our investments in 20 to 50-percent-ownedcompanies.  Under the equity method,investments are stated at cost plus or minus our equity in undistributedearnings or losses.  Revenues for thethree and six months ended June 30, 2002 from these joint ventures includemanagement fee revenue of $97 thousand and $184 thousand, respectively and consultingrelated revenue of $4 thousand and $5 thousand, respectively.  Revenues for the three and six months endedJune 30, 2001 included management fee revenue of $85 thousand and $91 thousand,respectively, and consulting revenue of $127 thousand and $151 thousand,respectively.

 

**Cost ofLicense Fees**

 

Cost of license fees consist primarily of amortization of capitalizedsoftware development costs and amounts paid to third parties with respect toproducts we resold in conjunction with the licensing of our products.  The elements can vary substantially fromperiod to period as a percentage of license fees.

 

Cost of license fees remained relatively flat for the three and sixmonths ended June 30, 2002, as compared to the corresponding prior yearperiods.  For the six month period endedJune 30, 2002 an increase of $145 thousand in the amortization of capitalizedsoftware development costs was mostly offset by a decrease of $97 thousand ofthird party software royalty fees and $15 thousand of documentation costs.

 

**Cost ofServices**

 

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

 

Cost of services decreased $1.0 million and $2.3 million or 19.7% and22.9% for the three and six months ended June 30, 2002, respectively, ascompared to the corresponding prior year periods.  The decreases for the three and six month periods are primarilydue to decreases of $0.8 million and $1.6 million, respectively, in personnelrelated costs due to a decrease in headcount and $0.1 million and $0.2 million,respectively, in variable compensation expense due to lower servicesrevenues.  The decrease is also relatedto a decrease of $0.1 million and $0.3 million, respectively, in cost of thirdparty services mainly in the United States. As a percentage of service revenues, cost of services decreased from58.6% and 57.5% for the three and six months ended June 30, 2001, respectively,to 45.6% and 47.1% for the three and six months ended June 30, 2002,respectively.

 

**Salesand Marketing**

 

Sales and marketing expenses consist primarily of salaries, commissionand bonuses related to sales and marketing personnel, as well as travel andpromotional expenses.

 

Sales and marketing expenses decreased $1.1 million and $2.5 million,or 35.4% and 41.7%, for the three and six months ended June 30, 2002,respectively, as compared to the corresponding prior year periods.  The decrease for the three and six monthperiods is primarily a result of a decrease in personnel costs of $1.0 millionand $2.0 million, respectively due to lower headcount.  The decrease for the six month period endedJune 30, 2002 is also the result of a decrease of $0.3 million in marketingprogram expenses due primarily to a decrease of $0.5 million in market researchand public relations expenses partially offset by an increase of $0.2 millionin trade show and user conference expenses.

 

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**Researchand Development**

 

Research and development expenses consist primarily of personnel costs,costs of equipment, facilities and third party software development costs.  Research and development expenses aregenerally charged to operations as incurred. However, certain software development costs are capitalized inaccordance with Statement of Financial Accounting Standards No. 86 (SFAS 86),“Accounting for the Costs of Computer Software to be Sold, Leased or OtherwiseMarketed.”  Such capitalized softwaredevelopment costs are generally amortized to cost of license fees on astraight-line basis over periods not exceeding three years.

 

Research and development expenses decreased $0.1 million and $0.3million or 6.7% and 8.2% for the three and six months ended June 30, 2002,respectively, as compared to the comparable prior year periods.  We capitalized $0.4 million in softwaredevelopment costs in the first half of 2002 as compared to $0.5 million in thefirst half of 2001.  The rate ofcapitalization of software development costs may fluctuate depending on the mixand stage of development of our product development and engineeringprojects.  The decrease in research anddevelopment costs for the three months ended June 30, 2002 is primarily the resultof a decrease of $0.1 million in personnel related expenses.  The decrease for the six months ended June30, 2002 is primarily the result of a decrease of $0.1 million in capitalizedsoftware development costs and $0.2 million in bonus compensation expense.

 

**Generaland Administrative**

 

General and administrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outside professionalfees.  General and administrativeexpenses decreased $1.7 million and $2.7 million or 61.2% and 55.6% for the threeand six months ended June 30, 2002, respectively, as compared to the comparableprior year periods.  The decrease forthe three and six months ended June 30, 2002 is primarily as a result of adecrease of $1.0 million and $1.2 million, respectively, in professional feesresulting from lower legal costs as well as a decrease of $0.3 million and $0.7million, respectively, in personnel related costs due to a decrease inheadcount.  The decrease for the sixmonth period is also the result of decreases of $0.1 million in rent expensedue to office closings and downsizing of rental space and $0.2 million in bonusexpense and a decrease in bad debt expense of $0.1 million resulting from apayment settlement with one customer.

 

Legal fees amounted to $0.7 million and $0.8 millionfor the three and six months ended June 30, 2001, respectively. The Securitiesand Exchange Commission (SEC) performed an investigation of AXS-One and ofcertain of our former employees and officers relating to activities performedthrough 1996 while they were our employees. We filed a Form 8-K with the SEC on February 15, 2001 disclosing the SECinvestigation and its disposition with respect to AXS-One.  In mid August 2001, we were informed bycounsel for our former employees and officers, whom we knew to be the subjectof the SEC investigation, that such counsel had been informed by the SEC thatthe SEC was no longer pursuing its investigation of their clients.  Under our certificate of incorporation, andDelaware law, we have an indemnification obligation to reimburse legal fees toformer employees and officers relating to actions taken against them for workperformed while they were our employees. Approximately $0.8 million in such estimated legal fees were recordedduring the year ended December 31, 2001. During the second quarter of 2002 approximately $0.3 million of thesecharges were reversed due to favorable settlements of outstanding billings withlegal firms.  The Company does notanticipate any further costs relating to this matter.

 

**OtherIncome (Expense)**

 

Other income (expense), net increased $(60) thousand and $(113)thousand for the three and six months ended June 30, 2002, respectively, ascompared to the comparable prior year periods. The increased expense for the three and six month periods is primarilydue to an increase of $166 thousand and $223 thousand of equity in lossesrelated to two

 

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joint ventures entered into during the first quarter of 2001 by ourSouth Africa operations.  This ispartially offset by the gain on the sale of our C.E.E. subsidiary of $51thousand and $70 thousand for the three and six month periods ended June 30,2002, respectively.  Interest expenserelates to the interest on the revolving line of credit and term loan. (SeeNote 2 to the Consolidated Interim Financial Statements.)

 

**Restructuringand Other Costs**

 

During June 2001, based on weakening economies,especially in the United States and to a lesser degree in certain foreignlocations, we eliminated 45 positions in the United States.  In addition, in certain foreign locations,we eliminated eight positions, wrote-off certain non-performing assets andcumulative foreign currency translation adjustment and recorded a charge forremaining leases.  We recorded a chargeto operations in the second quarter of 2001 totaling approximately $1.1 millionfor these items, reflecting approximately $0.6 million in termination costs ofthose personnel as well as $0.3 million in asset and cumulative foreigncurrency translation adjustment write-offs and $0.2 million in leasecosts.  During the third and fourthquarters of 2001, we adjusted downward the charge to operations byapproximately $(0.2) million and $(0.1) million respectively, reflectingrevised termination and lease costs.  Theserevisions resulted from management’s decision to retain certain employees inone of the foreign locations to develop software enhancements for the TivitySolutions segment.  The activity related to this restructuring is asfollows:

 
| **(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 |   |
| Write-off of  assets and cumulative foreign currency Translation adjustment |   | —                           |   | (300                                                                              | )      | —           |   | (300             | )      |
| Revision of the  restructuring costs in September 2001                      |   | (138                             | )      | —                                                                            |   | (28              | )      | (166             | )      |
| Revision of the  restructuring costs in December 2001                       |   | —                           |   | —                                                                            |   | (140             | )      | (140             | )      |
| Cash payments  through March 31, 2002                                       |   | (465                             | )      | —                                                                            |   | (32              | )      | (497             | )      |
| Restructuring  liability at June 30, 2002                                   |   | $                                | — |                                                                              | $      | —           |   | $                | — |   | $ | — |   |

 

**SegmentInformation**

 

For the three and six months ended June 30, 2002 the AXS-One EnterpriseSolutions segment had license fee revenues of $0.4 million and $0.9 million,respectively, compared to $0.6 million and $2.6 million, respectively, for thecomparable prior year period; services revenue of $6.8 million and $13.0million, respectively, compared to $7.1 million and $14.5 million, respectively,for the comparable prior year period; and operating income (loss) of $0.9million and $1.7 million, respectively, compared to $(1.2) million and $0.1million, respectively, for the comparable prior year period.  License fees were higher for the six monthsended June 30, 2001 due to a $1.2 million sale to one customer.  Service revenues decreased due to fewerdemands for upgrades in the installed base in the first quarter of 2002 as wellas the sale of our subsidiary located in C.E.E which had approximately $0.9million in services revenue for the six months ended June 30, 2001.  Services revenue for the three months endedJune 30, 2002 increased $0.3 million over the corresponding prior year periodwhen excluding prior year revenues of $0.5 million from C.E.E.

 

The AXSPoint Solutions segment had license fee revenues of $0.4 millionand $0.8 million, respectively, for the three and six months ended June 30,2002, compared to $0.2 million and $0.5 million, respectively for thecomparable prior

 

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year period; services revenue of $1.0 million and $2.2 million,respectively, compared to $1.0 million and $2.0 million, respectively; andoperating income (loss) of $0.8 million and $1.6 million, respectively, ascompared to $(0.1) million and $0.1 million, respectively.  The increase in license revenues was mainlydue to sales of new products to three existing customers.

 

Tivity Solutions had license fee revenues of none and $0.3 million,respectively, for the three and six months ended June 30, 2002, as compared to$0.1 million and $0.2 million, respectively, for the comparable prior yearperiods; service revenues of $0.6 million and $1.2 million, respectively, ascompared to $0.7 million and $1.8 million, respectively, and operating income(loss) of $(0.1) million and breakeven, respectively, as compared to $(0.5)million and $(0.8) million.  Theincrease in license fee revenue for the six months ended June 30, 2002 from thecomparable prior year period was primarily due to a license sale to onecustomer in the U.S. operation.  Thedecrease in services revenue for the six months ended June 30, 2002 as comparedto the comparable prior year period was the result of a decrease in consultingrevenue due to decreased demand for upgrades in the installed base.

 

The increase in operating income in all segments was primarily as aresult of decreases in cost of services and sales and marketing expensesthroughout the company.

 

**CriticalAccounting Policies**

 

Our critical accounting policies are as follows:

 
| • |   | Revenue recognition and                 |
|--------|--------|-----------------------------------------|
|   |   |                                    |
| • |   | Capitalized software development costs. |

 

***Revenue Recognition***

 

We derive our revenue from primarily two sources: (i) software licensesand (ii) services and support revenue, which includes software maintenance,training, consulting and custom programming revenue.  We also derive a limited amount of management fee revenue fromjoint ventures (approximately 1% of total revenue) entered into during 2001 byour South Africa operations.  Asdescribed below, significant management judgments and estimates must be madeand used in connection with the revenue recognized in any accountingperiod.  Material differences may resultin the amount and timing of our revenue for any period if our management madedifferent judgments or utilized different estimates.

 

We license our software products on a perpetual basis.  Each license agreement generally includes aprovision for initial post-contract support (maintenance).  For all license sales we use a signedlicense agreement as evidence of an arrangement.  For maintenance fees, we use a maintenance agreement as evidenceof the arrangement.  We use aprofessional services agreement as evidence of an arrangement for our training,custom programming and consulting revenues. Management fee revenues from our joint ventures are evidenced by masteragreements governing the relationship.

 

We recognize revenue in accordance with Statement of Position 97-2,“Software Revenue Recognition” (“SOP 97-2”), and Statement of Position 98-9,“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, we defer the VSOE related to the undelivered elements andrecognize revenue on the delivered elements using the residual method.  The most commonly deferred element isinitial maintenance, which is recognized

 

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on a straight-line basis over the initial maintenance term.  The VSOE of maintenance is determined byusing a consistent percentage of maintenance fee to license fee.  Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement.  Delivery of softwaregenerally occurs when the product (on CDs) is delivered to a common carrier.

 

The majority of our training and consulting services are billed basedon hourly rates.  We generally recognizerevenue as these services are performed. However, when we enter into an arrangement that requires us to performsignificant work either to alter the underlying software or to build additionalcomplex interfaces so that the software performs as the customer requests, werecognize the entire fee using contract accounting.  This would apply to our custom programming services, which are generallycontracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period suchlosses are determined.

 

Revenues from joint ventures (included in Revenues: Other-RelatedParties in the our Consolidated Statements of Operations) includes consultingrevenue for the joint ventures’ use of AXS-One’s South African subsidiary’sconsultants and for management fees from AXS-One’s subsidiary providingmanagerial, technical and other related services to the joint ventures inaccordance with the joint venture agreements. Revenue is recognized upon performance of the services.  For all our revenue transactions, we assesswhether the fee is fixed and determinable and whether or not collection isreasonably assured.  We assess whetherthe fee is fixed and determinable based on the payment terms associated withthe transaction.  If a significantportion of a fee is due after our normal payment terms, which are 30 to 90 daysfrom invoice date, we account for the fee as not being fixed anddeterminable.  In these cases, we recognizerevenue as the fees become due.

 

We assess assuredness of collection based on a number of factors,including past transaction history with the customer and the credit-worthinessof the customer.  We do not requestcollateral from our customers.  If we determinethat collection of a fee is not reasonably assured, we defer the fee andrecognize revenue at the time collection becomes reasonably assured, which isgenerally upon receipt of cash.

 

Our arrangements do not generally include acceptance clauses.  However, if an arrangement includes anacceptance provision, acceptance occurs upon the earlier of receipt of awritten customer acceptance or expiration of the acceptance period.

 

***Capitalized Software Development Costs***

 

Our policy is to capitalize certain software development costs inaccordance with Statement of Financial Accounting Standards No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”(“SFAS 86”).  Under SFAS 86, costsincurred to develop a computer software product are charged to research anddevelopment expense as incurred until technological feasibility has beenestablished.  We establish technologicalfeasibility upon completion of a detailed program design from which point allresearch and development costs for that project are capitalized until theproduct is available for general release to customers.  The establishment of technologicalfeasibility and the ongoing assessment of recoverability of capitalizedsoftware development costs require considerable judgment by management withrespect to certain external factors, including, but not limited to, anticipatedfuture revenues, estimated economic life and changes in technology.  It is reasonably possible that estimates ofanticipated future revenues, the remaining estimated economic life of theproducts, or both will be reduced in the future due to competitivepressures.  As a result, the carryingamount of the capitalized software costs may be reduced in the near term.  Upon the general release of the softwareproduct to customers, capitalization ceases and such costs are amortized (usingthe straight-line method) on a product-by-product basis over the estimatedlife, which is generally three years.

 

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**Liquidityand Capital Resources**

 

The net remaining amount available under the revolving line of creditat June 30, 2002 was approximately $0.1 million.  There was no available amount under the term loans at June 30,2002.  Effective August 8, 2002, wefurther amended the Agreement (See Note 2 to the Consolidated Interim FinancialStatements) to make available an additional term loan in the original principalamount of up to $1.5 million of which no amounts are outstanding.

 

We are required to comply with quarterly and annual financial statementreporting requirements, as well as certain restrictive financial and othercovenants.  The ability to continue toborrow under the Agreement is dependent upon future compliance with suchcovenants and available collateral. Management believes that our projected operating results throughout 2002will result in compliance under the Agreement, although there can be noassurances that such operating results will be achieved.

 

Our operating activities used cash of $1.6 million and $0.3 million forthe six months ended June 30, 2001 and 2002, respectively.  Net cash used by operations during the sixmonths ended June 30, 2001 was comprised primarily of the net loss offset bydepreciation and amortization expense, a decrease in accounts receivable and anincrease in deferred revenue and accounts payable and accrued expenses.  Net cash used by operating activities duringthe six months ended June 30, 2002 was comprised primarily of an increase inaccounts receivable and a decrease in accounts payable and accrued expensespartially offset by the net income, depreciation and amortization expense andan increase in deferred revenue.

 

Our investing activities used cash of $1.0 million and $0.5 million forthe six months ended June 30, 2001 and 2002, respectively. The principal usesduring 2001 were for equipment purchases and capitalized software developmentcosts.  For the six months ended June30, 2002 uses of cash were primarily for capitalized software developmentcosts.

 

Cash provided by financing activities was $1.2 million and $0.2 millionfor the six months ended June 30, 2001 and 2002, respectively, and relatedmainly to proceeds from the issuance of debt offset by repayments of debt forboth periods presented.

 

We have no significant capital commitments.  Planned capital expenditures for 2002 totalapproximately $1.0 million, including any software development costs that mayqualify for capitalization under SFAS 86. Our aggregate minimum operating lease payments for 2002 will beapproximately $1.6 million.  Wehave experienced recurring net losses of $3.7 million, $0.3 million and $4.7million during the years ended December 31, 1999, 2000 and 2001,respectively.  Additionally, as a resultof intense competition and rapid technological change together with the slowingeconomy we have also experienced declining license and service revenues.  In response to these conditions, managementhas pursued and is continuing to pursue several initiatives to improveoperating results and liquidity and better position AXS-One to compete undercurrent market conditions.  This included, but was not limited to, ourrestructuring effort in June, 2001 (See Note 5: Restructuring and Other Costs)whereby we were able to reduce costs sufficiently to allow us to generate netincome of $2.4 million for the twelve months ended June 30, 2002.  Due to these efforts, we expect that ouroperating cash flow and available financial resources will be sufficient to fundour working capital requirements through 2002. However, our ability to achieve the anticipated results is affected bythe extent of cash generated from operations and the pace at which we utilizeour available resources.  There is alsothe risk that cash held by our foreign subsidiaries will not be readilyavailable in our U.S. operations to pay our debt and other obligations as thetransfer of funds is subject to various foreign government restrictions.  Accordingly, we may in the future berequired to seek additional sources of financing or future accommodations fromour existing lender.  No assurance canbe given that management’s initiatives will be successful or that any suchadditional sources of financing or lender accommodations will be available.

 

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

 

In the normal course of business, we are exposed to fluctuations ininterest rates and equity market risks as we seek debt and equity capital tosustain our operations.  We are alsoexposed to fluctuations in foreign currency exchange rates as the financialresults of our foreign subsidiaries are translated into U.S. dollars inconsolidation.  We do not use derivativeinstruments or hedging to manage our exposures and do not currently hold anymarket risk sensitive instruments for trading purposes.

 

**CertainFactors That May Affect Future Results and Financial Condition and the MarketPrice of Securities**

 

See our 2001 Annual Report on Form 10K for a discussion of risk factors.

 

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**AXS-ONE INC.**

Part II

Other Information

 

**Item 1.  Legal Proceedings**

 

Historically, we have been involved in disputes and/or litigationencountered in our normal course of business. We believe that the ultimate outcome of these proceedings will not havea material adverse effect on our business, consolidated financial condition,results of operations or cash flows.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

At our Annual Meeting of Stockholders on June 12, 2002, the followingdirectors were nominated and elected by the votes indicated:

 
|               |   | **Votes For** |   | **Votes  Withheld** |
|--------------------|--------|---------------|--------|---------------------|
| Elias Typaldos     |   | 19,606,257    |   | 131,497             |
| John A. Rade       |   | 19,608,757    |   | 128,997             |
| Gennaro Vendome    |   | 19,608,757    |   | 128,997             |
| Daniel H. Burch    |   | 19,660,757    |   | 76,997              |
| Robert  Migliorino |   | 19,509,212    |   | 228,542             |
| William E. Vogel   |   | 19,660,757    |   | 76,997              |
| Edwin T. Brondo    |   | 19,608,757    |   | 128,997             |
| Allan Weingarten   |   | 19,660,757    |   | 76,997              |

 

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

 
| (a)    |   | Exhibits –                                      |
|--------|--------|------------------------------------------------------|
|   |   |                                                 |
|   |   | Amendment No. 12  to the Loan and Security Agreement |
|   |   |                                                 |
| (b)    |   | Reports on Form 8-K - None                           |

 

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**AXS-ONEINC.**

** **

SIGNATURES

 

We, the undersigned Chief Executive Officer and ChiefFinancial Officer of AXS-One Inc. (the “issuer”), do hereby certify that thisQuarterly Report on Form 10-Q fully complies with the requirements of section13(a) or 15(d) of the Securities Exchange Act of 1934, and that the informationcontained in this Quarterly Report on Form 10-Q fairly presents, in allmaterial respects, the financial condition and results of operations of theissuer.

 

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

 

 
|                             | AXS-ONE INC. |
|----------------------------------|--------------|
|                             |         |
|                             |         |
| **Date:**  August  13, 2002 | 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) |
|                                  |              |  |  |  |

 

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