**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

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

 

**AXS-ONE INC.**

(Exact name of registrantas specified in its charter)

** **

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

 

**(201) 935-3400**

(Registrant’s telephonenumber, including area code)

 

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

 

| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

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

 

| YES  o |   | NO  ý |
|------------------|--------|----------------------|

 

Number of sharesoutstanding of the issuer’s common stock as of November 4, 2002

 

| **Class**                                |   | **Number of Shares Outstanding** |
|------------------------------------------|--------|----------------------------------|
| Common Stock, par value  $0.01 per share |   | 24,848,742                       |

 

 

----

 

**AXS-ONE INC.**

 

**INDEX**

 
| **PART I**     | **FINANCIAL  INFORMATION** |
|----------------|----------------------------|
|           |                       |   |
|           | Item 1.                    | Financial Statements |
|           |                       |   |
|           |                       | Consolidated Balance Sheets  (unaudited)  December 31, 2001 and September 30, 2002 |
|           |                       | Consolidated  Statements of Operations (unaudited)  Three and nine months ended September 30, 2001 and 2002 |
|           |                       | Consolidated  Statements of Comprehensive Income (Loss) (unaudited)  Three and nine months ended September 30, 2001 and 2002 |
|           |                       | Consolidated  Statements of Cash Flows (unaudited)  Nine months ended September 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 |
|           |                       |   |
|           | Item  4.                   | Controls and Procedures |
|           |                       |   |
| **PART II**    | **OTHER INFORMATION**      |
|           |
|           | Item  1.                   | Legal Proceedings |
|           |
|           | Item  6.                   | Exhibits and Reports on Form 8-K |
|           |
| **SIGNATURES** |
|           |
|           | Signatures                 |
|           |
|           | Certifications             |

 

2

----

 

**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                                                                |   | **December 31,  2001** |   | **September 30,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                                          |   |                   |   |                    |   |
| Current assets:                                                                                                                                                     |   |                   |   |                    |   |
| Cash and cash  equivalents                                                                                                                                          |   | $                      | 1,048  |                    | $      | 645 |   |
| Restricted cash                                                                                                                                                     |   | 44                     |   | 79                      |   |
| Note receivable  - net of deferred gain on sale of subsidiary of $253 and $76 at December 31,  2001 and September 30, 2002, respectively                            |   | 83                     |   | —                  |   |
| Accounts receivable,  net of allowance for doubtful accounts of $657 and $457 at December 31, 2001  and September 30, 2002, respectively                            |   | 4,533                  |   | 4,955                   |   |
| Due from joint  venture                                                                                                                                             |   | 11                     |   | 292                     |   |
| Prepaid expenses  and other current assets                                                                                                                          |   | 469                    |   | 768                     |   |
| Total current  assets                                                                                                                                               |   | 6,188                  |   | 6,739                   |   |
| Equipment and  leasehold improvements, at cost:                                                                                                                     |   |                   |   |                    |   |
| Computer and  office equipment                                                                                                                                      |   | 10,392                 |   | 10,611                  |   |
| Furniture and  fixtures                                                                                                                                             |   | 952                    |   | 967                     |   |
| Leasehold  improvements                                                                                                                                             |   | 1,030                  |   | 1,070                   |   |
|                                                                                                                                                                |   | 12,374                 |   | 12,648                  |   |
| Less-accumulated  depreciation and amortization                                                                                                                     |   | 11,645                 |   | 12,220                  |   |
|                                                                                                                                                                |   | 729                    |   | 428                     |   |
| Capitalized  software development costs, net of accumulated amortization of $6,815 and  $7,804 at December 31, 2001 and September 30, 2002, respectively            |   | 2,908                  |   | 2,445                   |   |
| Investment in  and loans to joint ventures                                                                                                                          |   | 184                    |   | 60                      |   |
| Other assets                                                                                                                                                        |   | 51                     |   | 102                     |   |
|                                                                                                                                                                |   | $                      | 10,060 |                    | $      | 9,774 |   |
|                                                                                                                                                                |   |                   |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                                     |   |                   |   |                    |   |
| Current  liabilities:                                                                                                                                               |   |                   |   |                    |   |
| Current portion  of long-term debt                                                                                                                                  |   | $                      | 1,800  |                    | $      | 1,800 |   |
| Short term  borrowings                                                                                                                                              |   | —                 |   | 1,482                   |   |
| Accounts payable                                                                                                                                                    |   | 2,202                  |   | 2,026                   |   |
| Accrued expenses                                                                                                                                                    |   | 4,109                  |   | 3,081                   |   |
| Due to joint  venture                                                                                                                                               |   | —                 |   | 205                     |   |
| Deferred revenue                                                                                                                                                    |   | 8,782                  |   | 7,605                   |   |
| Total current  liabilities                                                                                                                                          |   | 16,893                 |   | 16,199                  |   |
| Long-term  liabilities:                                                                                                                                             |   |                   |   |                    |   |
| Long-term debt,  net of current portion                                                                                                                             |   | 1,347                  |   | 497                     |   |
| 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 24,849 shares issued and  outstanding at December 31, 2001 and September 30, 2002, respectively |   | 248                    |   | 248                     |   |
| Additional  paid-in capital                                                                                                                                         |   | 72,032                 |   | 72,052                  |   |
| Accumulated  deficit                                                                                                                                                |   | (80,693                | )      | (79,529                 | )      |
| Accumulated  other comprehensive income                                                                                                                             |   | 233                    |   | 307                     |   |
| Total  stockholders’ deficit                                                                                                                                   |   | (8,180                 | )      | (6,922                  | )      |
|                                                                                                                                                                |   | $                      | 10,060 |                    | $      | 9,774 |   |

 

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

 

3

----

 

**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
| Revenues:                                           |   |                                   |   |                                  |   |   |   |   |   |
| License fees                                        |   | $                                      | 773    |                                  | $      | 1,030 |   | $ | 4,014 |   | $ | 2,954 |   |
| Services                                            |   | 8,874                                  |   | 8,196                                 |   | 27,168 |   | 24,542 |   |
| Other-related  parties                              |   | 174                                    |   | 101                                   |   | 416 |   | 290 |   |
| Total revenues                                      |   | 9,821                                  |   | 9,327                                 |   | 31,598 |   | 27,786 |   |
|                                                |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:                                |   |                                   |   |                                  |   |   |   |   |   |
| Cost of license  fees                               |   | 316                                    |   | 393                                   |   | 1,057 |   | 1,095 |   |
| Cost of services                                    |   | 4,059                                  |   | 3,838                                 |   | 14,619 |   | 11,533 |   |
| Sales and  marketing                                |   | 1,502                                  |   | 1,379                                 |   | 7,763 |   | 4,815 |   |
| Research and  development                           |   | 1,607                                  |   | 1,697                                 |   | 5,338 |   | 5,123 |   |
| General and  administrative                         |   | 1,789                                  |   | 1,259                                 |   | 6,856 |   | 3,380 |   |
| Restructuring  and other costs, net                 |   | (166                                   | )      | —                                |   | 937 |   | — |   |
| Total operating  expenses                           |   | 9,107                                  |   | 8,566                                 |   | 36,570 |   | 25,946 |   |
| Operating income  (loss)                            |   | 714                                    |   | 761                                   |   | (4,972 | ) | 1,840 |   |
| Other income  (expense):                            |   |                                   |   |                                  |   |   |   |   |   |
| Interest income                                     |   | 4                                      |   | 8                                     |   | 99 |   | 31 |   |
| Interest expense                                    |   | (151                                   | )      | (100                                  | )      | (354 | ) | (275 | ) |
| Gain on sale of  subsidiary                         |   | —                                 |   | 149                                   |   | — |   | 219 |   |
| Equity in losses  of joint ventures                 |   | (103                                   | )      | (179                                  | )      | (176 | ) | (476 | ) |
| Other income  (expense)                             |   | 23                                     |   | (52                                   | )      | (143 | ) | (176 | ) |
| Other expense,  net                                 |   | (227                                   | )      | (174                                  | )      | (574 | ) | (677 | ) |
| Net income  (loss)                                  |   | $                                      | 487    |                                  | $      | 587 |   | $ | (5,546 | ) | $ | 1,163 |   |
|                                                |   |                                   |   |                                  |   |   |   |   |   |
| Basic net income  (loss) per common share           |   | $                                      | 0.02   |                                  | $      | 0.02 |   | $ | (0.22 | ) | $ | 0.05 |   |
| Diluted net  income (loss) per common share         |   | $                                      | 0.02   |                                  | $      | 0.02 |   | $ | (0.22 | ) | $ | 0.05 |   |
| Weighted average  basic common shares outstanding   |   | 24,785                                 |   | 24,827                                |   | 24,785 |   | 24,808 |   |
| Weighted average  diluted common shares outstanding |   | 24,875                                 |   | 25,170                                |   | 24,785 |   | 25,566 |   |

 

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

 

4

----

 

**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS****OF COMPREHENSIVE INCOME (LOSS)**

**(In thousands)**

**(Unaudited)**

 
|                                                                 |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                 |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
|                                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Net income (loss)                                                    |   | $                                      | 487    |                                  | $      | 587 |   | $ | (5,546 | ) | $ | 1,163 |   |
| Foreign currency translation adjustment                              |   | (74                                    | )      | (13                                   | )      | (79 | ) | 74 |   |
| Reclassification adjustment for losses included in net income (loss) |   | 167                                    |   | —                                |   | 407 |   | — |   |
| Comprehensive income (loss)                                          |   | $                                      | 580    |                                  | $      | 574 |   | $ | (5,218 | ) | $ | 1,237 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

----

 

**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                        |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                        |   | **2001**                              |   | **2002** |   |
| Cash flows from  operating activities:                                                      |   |                                  |   |   |   |
| Net income  (loss)                                                                          |   | $                                     | (5,546 | ) | $ | 1,163 |   |
| Adjustments to  reconcile net income (loss) to net cash flows used in operating activities: |   |                                  |   |   |   |
| Increase in cash  surrender value of officers’ life insurance                          |   | —                                |   | (41 | ) |
| Depreciation and  amortization                                                              |   | 1,538                                 |   | 1,473 |   |
| Recovery of  doubtful accounts, net of provisions                                           |   | (56                                   | )      | (63 | ) |
| Gain on sale of  subsidiary                                                                 |   | —                                |   | (219 | ) |
| Loss on disposal  of equipment and leashold improvements                                    |   | 17                                    |   | — |   |
| Non-cash portion  of restructuring and other costs                                          |   | 308                                   |   | — |   |
| Loss on equity  method investments                                                          |   | 176                                   |   | 476 |   |
| Non-cash portion  of consulting services                                                    |   | —                                |   | 136 |   |
| Changes in  current assets and liabilities, net of divestiture                              |   |                                  |   |   |   |
| Restricted cash                                                                             |   | —                                |   | (32 | ) |
| Accounts  receivable                                                                        |   | 1,123                                 |   | (182 | ) |
| Due from joint  venture                                                                     |   | —                                |   | (292 | ) |
| Prepaid expenses  and other current assets                                                  |   | (40                                   | )      | (280 | ) |
| Accounts payable  and accrued expenses                                                      |   | 79                                    |   | (1,400 | ) |
| Deferred revenue                                                                            |   | 1,544                                 |   | (1,191 | ) |
| Net cash flows  used in operating activities                                                |   | (857                                  | )      | (452 | ) |
|                                                                                        |   |                                  |   |   |   |
| Cash flows from  investing activities:                                                      |   |                                  |   |   |   |
| Change in other  assets                                                                     |   | 40                                    |   | (9 | ) |
| Proceeds from  sale of subsidiary                                                           |   | —                                |   | 67 |   |
| Loans to joint  ventures                                                                    |   | —                                |   | (125 | ) |
| Capitalized  software development costs                                                     |   | (750                                  | )      | (526 | ) |
| Purchase of  equipment and leasehold improvements                                           |   | (470                                  | )      | (169 | ) |
| Net cash flows  used in investing activities                                                |   | (1,180                                | )      | (762 | ) |
|                                                                                        |   |                                  |   |   |   |
| Cash flows from  financing activities:                                                      |   |                                  |   |   |   |
| Proceeds from  exercise of stock options                                                    |   | —                                |   | 20 |   |
| Net borrowings  from revolving line of credit                                               |   | —                                |   | 1,482 |   |
| Proceeds from issuance  of long-term debt                                                   |   | 2,000                                 |   | 500 |   |
| Payments of long  term debt and capital lease obligations                                   |   | (1,325                                | )      | (1,350 | ) |
| Net cash flows  provided by financing activities                                            |   | 675                                   |   | 652 |   |
| Foreign currency  exchange rate effects                                                     |   | (218                                  | )      | 159 |   |
| Net decrease in  cash and cash equivalents                                                  |   | (1,580                                | )      | (403 | ) |
| Cash and cash  equivalents, beginning of period                                             |   | 2,207                                 |   | 1,048 |   |
| Cash and cash  equivalents, end of period                                                   |   | $                                     | 627    |   | $ | 645 |   |
|                                                                                        |   |                                  |   |   |   |
| Supplemental  disclosures of cash flow information:                                         |   |                                  |   |   |   |
| Cash paid during  the period for -                                                          |   |                                  |   |   |   |
| Interest                                                                                    |   | $                                     | 279    |   | $ | 274 |   |
| Income taxes                                                                                |   | $                                     | 5      |   | $ | 15 |   |
| Non-cash  investing activities -                                                            |   |                                  |   |   |   |
| Investment in  and loans to joint ventures                                                  |   | $                                     | 463    |   | $ | — |   |
| Consulting  services received in lieu of payment on note receivable                         |   | $                                     | — |   | $ | 136 |   |

 

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

 

6

----

 

**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

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

 

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

 

The Company designs, markets and supports n-tier, Internet-enabled,client/server, e-commerce, financial, workflow, and desktop data access andstorage software solutions 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) *Basisof 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 the UnitedKingdom (collectively, the *“Company*”).  All significant intercompany transactions and balances have beeneliminated.  During the first quarter of2001, the Company’s South Africa operations entered into two jointventures.  Ownership is 50% or less inboth entities.  The Company uses theequity method of accounting for its joint ventures that it owns between 20 and50 percent.  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 three and nine month periods endedSeptember 30, 2002 are not necessarily indicative of results to be expected forany future periods.

 

(b) *RevenueRecognition*

 

The Company recognizes revenue in accordance with Statement of Position97-2, “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, 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.

 

For these revenue transactions, the Company assesses whether the fee isfixed and determinable and whether or not collection is reasonably assured. TheCompany assesses whether the fee is fixed and determinable based on the

 

7

----

 

payment terms associated with the transaction.  If a significant portion of a fee is dueafter the Company’s normal payment terms, which are 30 to 90 days from invoicedate, it accounts for the fee as not being fixed and determinable.  In these cases, the Company recognizesrevenue as the fees become due.

 

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.

 

Revenues from joint ventures (included in Revenues: Other-RelatedParties in the Company’s Consolidated Statements of Operations) includes consultingrevenue for the joint ventures’ use of the Company’s South African subsidiary’sconsultants (2001 only) and for management fees for the Company’s subsidiaryproviding managerial, technical and other related services to the jointventures (2001 and 2002 periods) in accordance with the joint ventureagreements.  Revenue is recognized uponperformance of the services.

 

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 of thisconsensus, comparative financial statements for prior periods should be reclassifiedto comply with the guidance in this consensus. For the three and nine months ended September 30, 2001, the adoption ofthe consensus resulted in a reclassification to services revenue and cost ofservices of $0.3 million and $0.9 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.  There was no amount availableunder the revolving line of credit at September 30, 2002 as the Company hadborrowed the maximum amount allowed by the bank.

 

8

----

 

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 September 30, 2002) plus 1.5% subjectto a minimum 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,of which the Company borrowed $500 on November 3, 2000 and requested theremaining $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 September 30, 2002) plus 1.5% subject to a minimum interest rateof 8.0% per annum.  The B Term Loanbears interest 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.  This amendment alsoextended the termination date of the credit facility to March 31, 2004 andestablished restrictive financial covenants for 2001.  The availability of the Additional B Term Loan was subject to theCompany’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 cumulativequarterly EBITDA.  The Company was incompliance with these new covenants 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 of which the Company borrowed $250 on August 21, 2002 and $250 onSeptember 13, 2002, and to revise the Amendment No. 11 EBITDA covenants for theremainder of 2002.  The Company was incompliance with these new covenants through September 30, 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 andinterest 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% of

 

9

----

 

eligible maintenance revenues from January 1, 2003 through March 31,2004 and (ii) $4.5 million, then the Company is required to prepay theprincipal amount in an amount sufficient to cause the aggregate principalamount of the Term Loans to be less than or equal to the relevant limits setforth above.  As of September 30, 2002,eligible maintenance revenues as defined, totaled approximately $12.1 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 their clients.  Under the Company’s certificate ofincorporation, and Delaware law, the Company has an indemnification obligationto reimburse legal fees to former employees and officers relating to actionstaken against them for work performed while they were employed by theCompany.  Approximately $0.8 million insuch estimated legal fees were recorded in general and administrative expensesduring the nine months ended September 30, 2001.  During the second quarter of 2002, approximately $0.3 million ofthese charges were reversed due to favorable settlements of outstandingbillings with legal firms.  The Companydoes not anticipate any further costs relating to this 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) PERCOMMON SHARE**

 

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

 

Basic net income (loss) per common share is based on the weightedaverage number of shares of common stock outstanding during the period.  Diluted net loss per common share is thesame as basic net loss per common share for the nine months ended September 30,2001 since the effect of stock options and warrants is anti-dilutive.  Diluted net income (loss) per common sharefor the three and nine months ended September 30, 2001 does not include theeffects of outstanding options to purchase 4,717 and 5,392 shares of commonstock, respectively, and outstanding warrants to purchase 476 and 476 shares ofcommon stock, respectively, as the effect of their inclusion is anti-dilutivefor the periods.  Diluted net income percommon share for the three and nine months ended September 30, 2002 does notinclude the effects of outstanding options to purchase 4,342 and 3,538 sharesof common stock, respectively, and outstanding warrants to purchase 476 and 476shares of common stock, respectively, as the effect of their inclusion isanti-dilutive for the periods.

 

The following represents the calculations of the basic and diluted netincome (loss) per common share for the three and nine months ended September30, 2001 and 2002.

 

10

----

 
|                                                                   |   | **Three  Months EndedSeptember 30,** |   | **Nine  Months EndedSeptember 30,** |   |
|------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                   |   | **2001**                             |   | **2002**                            |   | **2001** |   | **2002** |   |
|                                                                   |   |                                 |   |                                |   |   |   |   |   |
| Net income  (loss)                                                     |   | $                                    | 487    |                                | $      | 587 |   | $ | (5,546 | ) | $ | 1,163 |   |
|                                                                   |   |                                 |   |                                |   |   |   |   |   |
| Weighted average  basic common shares outstanding during the periods   |   | 24,785                               |   | 24,827                              |   | 24,785 |   | 24,808 |   |
|                                                                   |   |                                 |   |                                |   |   |   |   |   |
| Effect of  dilutive securities:                                        |   |                                 |   |                                |   |   |   |   |   |
| Stock options                                                          |   | 90                                   |   | 343                                 |   | — |   | 758 |   |
| Weighted average  diluted common shares outstanding during the periods |   | 24,875                               |   | 25,170                              |   | 24,785 |   | 25,566 |   |
|                                                                   |   |                                 |   |                                |   |   |   |   |   |
| Basic net income  (loss) per common share                              |   | $                                    | 0.02   |                                | $      | 0.02 |   | $ | (0.22 | ) | $ | 0.05 |   |
|                                                                   |   |                                 |   |                                |   |   |   |   |   |
| Diluted net  income (loss) per common share                            |   | $                                    | 0.02   |                                | $      | 0.02 |   | $ | (0.22 | ) | $ | 0.05 |   |

 

**(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,the Company eliminated eight positions, wrote-off certain non-performing assetsand cumulative foreign currency translation adjustment and recorded a chargefor remaining leases.  The Companyrecorded a charge to operations in the second quarter of 2001 totalingapproximately $1.1 million for these items, reflecting approximately $0.6million in termination costs of those personnel as well as $0.3 million inasset and cumulative foreign currency translation adjustment write-offs and$0.2 million in lease costs.  During thethird and fourth quarters of 2001, the Company adjusted downward the charge tooperations by approximately $(0.2) million and $(0.1) million respectively,reflecting revised termination and lease costs.  These revisions resulted from the Company’s decision toretain certain employees in one of the foreign locations to develop softwareenhancements for the Tivity Solutions segment. The activity related to thisrestructuring 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 September 30, 2002                              |   | $                                    | — |                                                                              | $      | —           |   | $                | — |   | $ | — |   |

 

11

----

 

**(6)   OPERATING SEGMENTS**

 

The Company is organized into three separate business segments based onproducts it offers to specific markets. The three business 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 AXSPoint Solutionssegment is focused on identifying markets that need to rapidly leverage theInternet in communicating, exchanging or reconciling large volumes of knowledgewith their customers, suppliers and partners. The AXSPoint Solutions segment targets large information-centricorganizations that can utilize self-service information systems to improvecommunications with their customers and improve access to businessintelligence.

 

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.

 

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 September 30, 2001**       |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 651    |                    | $      | 103                   |   | $         | 19     |   | $ | 773 |   |
| Services                                         |   | 6,969                              |   | 1,153                   |   | 752                   |   | 8,874     |   |
| Total revenues,  excluding related party revenue |   | 7,620                              |   | 1,256                   |   | 771                   |   | 9,647     |   |
| Operating income                                 |   | 1,888                              |   | 547                     |   | 49                    |   | 2,484     |   |
| Total assets                                     |   | 9,005                              |   | 1,101                   |   | 883                   |   | 10,989    |   |
| Capital  expenditures                            |   | 9                                  |   | 2                       |   | —                |   | 11        |   |
| Depreciation and  amortization                   |   | 453                                |   | 17                      |   | 32                    |   | 502       |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Three  Months Ended September 30, 2002**       |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 180    |                    | $      | 827                   |   | $         | 23     |   | $ | 1,030 |   |
| Services                                         |   | 6,445                              |   | 1,028                   |   | 723                   |   | 8,196     |   |
| Total revenues,  excluding related party revenue |   | 6,625                              |   | 1,855                   |   | 746                   |   | 9,226     |   |
| Operating income                                 |   | 741                                |   | 1,202                   |   | 171                   |   | 2,114     |   |
| Total assets                                     |   | 7,844                              |   | 1,208                   |   | 722                   |   | 9,774     |   |
| Capital  expenditures                            |   | 103                                |   | 10                      |   | 10                    |   | 123       |   |
| Depreciation and  amortization                   |   | 436                                |   | 9                       |   | 9                     |   | 454       |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Nine  Months Ended September 30, 2001**        |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 3,220  |                    | $      | 575                   |   | $         | 219    |   | $ | 4,014 |   |
| Services                                         |   | 21,479                             |   | 3,179                   |   | 2,510                 |   | 27,168    |   |
| Total revenues,  excluding related party revenue |   | 24,699                             |   | 3,754                   |   | 2,729                 |   | 31,182    |   |
| Operating income  (loss)                         |   | 1,961                              |   | 675                     |   | (724                  | )      | 1,912     |   |
| Total assets                                     |   | 9,005                              |   | 1,101                   |   | 883                   |   | 10,989    |   |
| Capital  expenditures                            |   | 396                                |   | 37                      |   | 37                    |   | 470       |   |
| Depreciation and  amortization                   |   | 1,384                              |   | 56                      |   | 98                    |   | 1,538     |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Nine  Months Ended September 30, 2002**        |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 1,077  |                    | $      | 1,591                 |   | $         | 286    |   | $ | 2,954 |   |
| Services                                         |   | 19,406                             |   | 3,178                   |   | 1,958                 |   | 24,542    |   |
| Total revenues                                   |   | 20,483                             |   | 4,769                   |   | 2,244                 |   | 27,496    |   |
| Operating income                                 |   | 2,425                              |   | 2,800                   |   | 173                   |   | 5,398     |   |
| Total assets                                     |   | 7,844                              |   | 1,208                   |   | 722                   |   | 9,774     |   |
| Capital  expenditures                            |   | 141                                |   | 14                      |   | 14                    |   | 169       |   |
| Depreciation and  amortization                   |   | 1,393                              |   | 39                      |   | 41                    |   | 1,473     |   |

 

12

----

 

Reconciliation of totalsegment operating income to consolidated operating income (loss):

 
|                                               |   | **Three  Months EndedSeptember 30,** |   | **Nine  Months EndedSeptember 30,** |   |
|----------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                               |   | **2001**                             |   | **2002**                            |   | **2001** |   | **2002** |   |
| Operating income  from reportable segments         |   | $                                    | 2,484  |                                | $      | 2,114 |   | $ | 1,912 |   | $ | 5,398 |   |
| Unallocated  revenue, other – related parties |   | 174                                  |   | 101                                 |   | 416 |   | 290 |   |
| Unallocated  general and administrative expense    |   | (1,739                               | )      | (1,242                              | )      | (6,664 | ) | (3,326 | ) |
| Other corporate  unallocated expenses              |   | (205                                 | )      | (212                                | )      | (636 | ) | (522 | ) |
| Total  consolidated operating income (loss)        |   | $                                    | 714    |                                | $      | 761 |   | $ | (4,972 | ) | $ | 1,840 |   |

 

**(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

 

13

----

 

Bulletin No. 81 (SAB 81), “Gain Recognition on the Sale of a Businessor Operating Assets to a Highly Leveraged Entity.”  An additional direct cost of the sale of $3 was recorded duringthe three months ended June 30, 2002 bringing the total deferred gain down to$250.

 

In accordance with SAB 81, the Company has presented, in theaccompanying consolidated balance sheet, the deferred gain as an offset to thenote receivable.  The Company recognizessuch gain as the note receivable is paid or equivalent value for services isreceived, but only after $180 is received. Through September 30, 2002, $354 had been  received in either payments to the Company or equivalent servicesprovided by the Buyer.  The Company hasrecognized $219 of such gain through September 30, 2002, which includes areversal of $45 related to the original $180 in accrued expenses recorded atthe time of the sale.  The $45 was recognizedduring the three months ended September 30, 2002 as a result of the release ofa past customer claim.

 

The following table shows the activity related to thepromissory note and related deferred gain and gain:

 
|                                                            |   | **NoteReceivable** |   | **DeferredGain** |   | **GainRecognized** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|------------------|--------|--------------------|--------|
| September 20,  2001                                             |   | $                  | 430    |             | $      | 253                |   | $ | — |   |
| Direct expense  incurred in June 2002                           |   | —             |   | (3               | )      | —             |   |
| Cash payments  and services provided through September 30, 2002 |   | (354               | )      | (174             | )      | 174                |   |
| Reversal of  accrued expense in September 2002                  |   | —             |   | —           |   | 45                 |   |
| Balance at  September 30, 2002                                  |   | $                  | 76     |             | $      | 76                 |   | $ | 219 |   |

 

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 nine months endedSeptember 30, 2001.

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

 

14

----

 

**Item 2.****Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

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.  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,competitive conditions 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 $0.6 million and $1.2 million for the three and ninemonths ended September 30, 2002, respectively, and operating income of $0.8 and$1.8 million, respectively, for the same periods.

 

**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

 

15

----

 

long-lived assets.  Thisstatement supersedes Statement No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of.”  The adoption of SFAS 144 was requiredbeginning January 1, 2002.  The adoptionof SFAS No. 144 on January 1, 2002 did not have a material effect on ourconsolidated financial position or results 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 $0.9 million for the three and nine months ended September 30,2001, respectively.  There was no effecton either our consolidated operating income (loss) or net income (loss).

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 nullifiesEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) andrequires that a liability for costs associated with an exit or disposalactivity be recognized and measured initially at fair value in the period inwhich the liability is incurred.  UnderEITF 94-3, a liability for an exit cost was recognized at the date of anentity’s commitment to an exit plan. The adoption of SFAS 146 is expected to result in delayed recognitionfor certain types of costs as compared to the provisions of EITF 94-3.  SFAS 146 is effective for new exit ordisposal activities that are initiated after December 31, 2002, and does notaffect amounts currently reported in our consolidated financialstatements.  SFAS 146 will affect thetypes and timing of costs included in future restructuring programs, if any,but is not expected to have a material impact on our consolidated financial positionor results of operations.

 

**Euro Currency**

 

On January 1, 1999, certain countries of the European Union establishedfixed conversion rates between their existing currencies and one commoncurrency, the euro.  The euro then beganto trade on currency exchanges and to be used in business transactions.  Beginning in January 2002, neweuro-denominated currencies 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 30.7%of our total revenues outside the United States for 2001.  We derived approximately 29.5% of our totalrevenues outside the United States for the nine months ended September 30,2002. The euro conversion did not have a material effect on our consolidated financialposition or results of operations.

 

16

----

 

**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.  The 2001 data reflects the reclassificationof services revenue and cost of services related to the application of EITF IssueNo. 01-14.

 
|                                |   | **Three  Months Ended  September 30, 2001** |   | **Three  Months Ended  September 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                        |   | $                                           | 773    |                                        | $      | — |   | $ | 773 |   | 8.1 | % | $ | 1,030 |   | 11.0 | % |
| Services                            |   | 8,874                                       |   | 272                                         |   | 8,602 |   | 90.1 |   | 8,196 |   | 87.9 |   |
| Other-related  parties              |   | 174                                         |   | —                                      |   | 174 |   | 1.8 |   | 101 |   | 1.1 |   |
| Total revenues                      |   | 9,821                                       |   | 272                                         |   | 9,549 |   | 100.0 |   | 9,327 |   | 100.0 |   |
|                                |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |
| Operating expenses:                 |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |
| Cost of license  fees               |   | 316                                         |   | 6                                           |   | 310 |   | 3.2 |   | 393 |   | 4.2 |   |
| Cost of services                    |   | 4,059                                       |   | 186                                         |   | 3,873 |   | 40.6 |   | 3,838 |   | 41.1 |   |
| Sales and  marketing                |   | 1,502                                       |   | 93                                          |   | 1,409 |   | 14.8 |   | 1,379 |   | 14.8 |   |
| Research and  development           |   | 1,607                                       |   | —                                      |   | 1,607 |   | 16.8 |   | 1,697 |   | 18.2 |   |
| General and  administrative         |   | 1,789                                       |   | 164                                         |   | 1,625 |   | 17.0 |   | 1,259 |   | 13.5 |   |
| Restructuring  and other costs      |   | (166                                        | )      | —                                      |   | (166 | ) | (1.7 | ) | — |   | — |   |
| Total operating  expenses           |   | 9,107                                       |   | 449                                         |   | 8,658 |   | 90.7 |   | 8,566 |   | 91.8 |   |
| Operating income  (loss)            |   | 714                                         |   | (177                                        | )      | 891 |   | 9.3 |   | 761 |   | 8.2 |   |
| Other income  (expense):            |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |
| Interest income                     |   | 4                                           |   | 1                                           |   | 3 |   | — |   | 8 |   | 0.1 |   |
| Interest expense                    |   | (151                                        | )      | (15                                         | )      | (136 | ) | (1.4 | ) | (100 | ) | (1.1 | ) |
| Gain on sale of  subsidiary         |   | —                                      |   | —                                      |   | — |   | — |   | 149 |   | 1.6 |   |
| Equity in losses  of joint ventures |   | (103                                        | )      | —                                      |   | (103 | ) | (1.1 | ) | (179 | ) | (1.9 | ) |
| Other income  (expense)             |   | 23                                          |   | —                                      |   | 23 |   | 0.2 |   | (52 | ) | (0.6 | ) |
| Other expense,  net                 |   | (227                                        | )      | (14                                         | )      | (213 | ) | (2.3 | ) | (174 | ) | (1.9 | ) |
| Net income  (loss)                  |   | $                                           | 487    |                                        | $      | (191 | ) | $ | 678 |   | 7.0 | % | $ | 587 |   | 6.3 | % |

 

17

----

 
|                                |   | **Nine  Months Ended  September 30, 2001** |   | **Nine  Months Ended  September 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                        |   | $                                          | 4,014  |                                       | $      | 205 |   | $ | 3,809 |   | 12.6 | % | $ | 2,954 |   | 10.6 | % |
| Services                            |   | 27,168                                     |   | 1,208                                      |   | 25,960 |   | 86.0 |   | 24,542 |   | 88.3 |   |
| Other-related  parties              |   | 416                                        |   | —                                     |   | 416 |   | 1.4 |   | 290 |   | 1.1 |   |
| Total revenues                      |   | 31,598                                     |   | 1,413                                      |   | 30,185 |   | 100.0 |   | 27,786 |   | 100.0 |   |
|                                |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Cost of license  fees               |   | 1,057                                      |   | 77                                         |   | 980 |   | 3.3 |   | 1,095 |   | 4.0 |   |
| Cost of services                    |   | 14,619                                     |   | 761                                        |   | 13,858 |   | 45.9 |   | 11,533 |   | 41.5 |   |
| Sales and marketing                 |   | 7,763                                      |   | 456                                        |   | 7,307 |   | 24.2 |   | 4,815 |   | 17.3 |   |
| Research and  development           |   | 5,338                                      |   | —                                     |   | 5,338 |   | 17.7 |   | 5,123 |   | 18.4 |   |
| General and  administrative         |   | 6,856                                      |   | 451                                        |   | 6,405 |   | 21.2 |   | 3,380 |   | 12.2 |   |
| Restructuring  and other costs      |   | 937                                        |   | —                                     |   | 937 |   | 3.1 |   | — |   | — |   |
| Total operating  expenses           |   | 36,570                                     |   | 1,745                                      |   | 34,825 |   | 115.4 |   | 25,946 |   | 93.4 |   |
| Operating income  (loss)            |   | (4,972                                     | )      | (332                                       | )      | (4,640 | ) | (15.4 | ) | 1,840 |   | 6.6 |   |
| Other income  (expense):            |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Interest income                     |   | 99                                         |   | 69                                         |   | 30 |   | 0.1 |   | 31 |   | 0.1 |   |
| Interest expense                    |   | (354                                       | )      | (40                                        | )      | (314 | ) | (1.0 | ) | (275 | ) | (1.0 | ) |
| Gain on sale of  subsidiary         |   | —                                     |   | —                                     |   | — |   | — |   | 219 |   | 0.8 |   |
| Equity in losses  of joint ventures |   | (176                                       | )      | —                                     |   | (176 | ) | (0.6 | ) | (476 | ) | (1.7 | ) |
| Other income  (expense), net        |   | (143                                       | )      | —                                     |   | (143 | ) | (0.5 | ) | (176 | ) | (0.6 | ) |
| Other income  (expense), net        |   | (574                                       | )      | 29                                         |   | (603 | ) | (2.0 | ) | (677 | ) | (2.4 | ) |
| Net income  (loss)                  |   | $                                          | (5,546 | )                                          | $      | (303 | ) | $ | (5,243 | ) | (17.4 | )% | $ | 1,163 |   | 4.2 | % |

 

**Note:     **The followingdiscussions relate to changes in the results of operations excluding C.E.E. forthe periods presented.

 

**TotalRevenues**

 

Total revenues decreased $0.2 million or 2.3% and $2.4 million or 7.9%for the three and nine months ended September 30, 2002, respectively, ascompared to the corresponding prior year periods.  The decrease for the three month period is mainly the result of a$0.4 million decrease in service revenues and $0.1 million in other–relatedparty revenues partially offset by a $0.3 million increase in licensefees.  The decrease for the nine month periodis mainly attributable to a decrease of $0.3 million in license fees and $1.0million in service revenues in the U.S. operations, and a decrease of $1.1million in revenues in our foreign subsidiaries.  This was primarily the result of a continued slow down in theeconomy, the effects of which are being felt throughout the software industry,and increased competition in the services industry.

 

We derived approximately $2.9 million and $8.2 million, or 30.9% and29.5%, of our total revenues from customers outside of the United States forthe three and nine months ended September 30, 2002, respectively, compared to$2.8 million and $9.4 million, or 29.3% and 31.0%, 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 could result in fluctuations in our revenue.

 

18

----

 

***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 increased $0.3 million or 33.2% for the threemonths ended September 30, 2002 and decreased $0.9 million or 22.4% for thenine months ended September 30, 2002, as compared to the corresponding prioryear periods.  The decrease in the ninemonth period is mainly the result of the absence of a large license contractfrom one customer as noted below. License fees for the three months ended September 30, 2002 included $0.7million or 70.4% of total license fees from two customers.  License fees for the nine months endedSeptember 30, 2002 included $1.3 million or 42.7% of total license fees fromthree customers.  License fees for thenine months ended September 30, 2001 included $1.2 million or 31.6% of totallicense fees from one customer.

 

***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 themaintenance agreement.  Training,consulting, and custom programming revenues are recognized as the services areperformed.

 

Service revenues decreased $0.4 million or 4.7% and $1.4 million or5.5% for the three and nine months ended September 30, 2002, respectively, ascompared to the comparable prior year periods. The decrease for the nine month period partially relates to an $0.8million decrease in consulting revenue resulting from fewer demands forupgrades in the installed base thereby requiring less implementationservices.  The decrease is also a resultof a $0.4 million decrease in maintenance revenues.  Maintenance revenues for the nine months ended September 30, 2001were higher than for the same period in 2002 because the 2001 period includedrevenues from customers related to prior year negotiated settlements and fromincremental maintenance for continued support of older versions of our softwareno longer supported under current maintenance agreements.

 

Service revenues for the three months ended September 30, 2002 included$2.7 million or 32.7% of total service revenues from two customers.  Service revenues for the nine months endedSeptember 30, 2002 included $7.3 million or 29.8% of total service revenuesfrom two customers.

 

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 September 30,** |   | **Nine  Months Ended September 30,** |   |
|------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                   |   | **2001(a)**                           |   | **2002**                             |   | **2001(a)** |   | **2002** |   |
| **(in  thousands)**    |   | **Amount**                            |   | **%****of  Total**                   |   | **Amount** |   | **%****of  Total** |   | **Amount** |   | **%****of  Total** |   | **Amount** |   | **%****of  Total** |   |
| Maintenance            |   | $                                     | 4,001  |                                 | 46.5   | % | $ | 4,089 |   | 49.9 | % | $ | 12,313 |   | 47.5 | % | $ | 11,915 |   | 48.6 | % |
| Consulting             |   | 4,379                                 |   | 50.9                                 | %      | 3,945 |   | 48.1 | % | 13,109 |   | 50.5 | % | 12,266 |   | 50.0 | % |
| Training               |   | 22                                    |   | 0.3                                  | %      | 49 |   | 0.6 | % | 137 |   | 0.5 | % | 105 |   | 0.4 | % |
| Custom programming     |   | 200                                   |   | 2.3                                  | %      | 113 |   | 1.4 | % | 401 |   | 1.5 | % | 256 |   | 1.0 | % |
| Total services revenue |   | $                                     | 8,602  |                                 | 100.0  | % | $ | 8,196 |   | 100.0 | % | $ | 25,960 |   | 100.0 | % | $ | 24,542 |   | 100.0 | % |

 

----

(a) Excluding C.E.E.

 

19

----

 

***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 primarily inthe hospitality industry.  Ownership is50% or less in each joint venture.  Weuse the equity method of accounting for our investments in 20 to50-percent-owned companies.  Under theequity method, investments are stated at cost plus or minus our equity inundistributed earnings or losses. Revenues for the three and nine months ended September 30, 2002 fromthese joint ventures include management fee revenue of $95 thousand and $279thousand, respectively and consulting revenue of $6 thousand and $11 thousand,respectively.  Revenues for the threeand nine months ended September 30, 2001 included management fee revenue of$117 thousand and $208 thousand, respectively, and consulting revenue of $57thousand and $208 thousand, respectively.

 

Management fees for the nine months ended September 30, 2002 are higherthan for the same period in 2001 as the 2001 period only represents sevenmonths of trading from the new joint venture. The decrease in consulting revenue for both periods resulted from thetransfer of the consulting staff and related services to AfricanSolutions.  Consulting services are nowprovided to our customers by the joint venture.

 

**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 increased $0.1 million and $0.1 million or 26.8%and 11.7% for the three and nine months ended September 30, 2002, respectively,as compared to the corresponding prior year periods.  For the nine month period ended September 30, 2002 an increase of$227 thousand in the amortization of capitalized software development costs waspartially offset by a decrease of $65 thousand of third party software royaltyfees and $32 thousand of documentation costs. The increase in the amortization of software development costs is due tothe release of software during 2002 for which amounts were previouslycapitalized.

 

**Cost ofServices**

 

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

 

Cost of services remained flat for the three months ended September 30,2002 while decreasing $2.3 million or 16.8% for the nine months ended September30, 2002, as compared to the corresponding prior year periods.  The decrease for the nine month period isprimarily due to decreases of $1.6 million in personnel related costs due to adecrease in headcount and $0.2 million in variable compensation expense due tolower services revenues.  The decreaseis also related to a decrease of $0.2 million in cost of third party servicesmainly in the United States due to reduced usage of third party consultants.

 

**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 remained relatively flat for the threemonths ended September 30, 2002 while decreasing $2.5 million or 34.1% for thenine months ended September 30, 2002, as compared to the corresponding

 

20

----

 

prior year periods.  Thedecrease for the nine month period is primarily a result of a decrease inpersonnel costs of $2.1 million due to lower headcount.  The decrease is also the result of adecrease of $0.4 million in marketing program expenses due primarily to adecrease of $0.6 million in market research and advertising expenses partiallyoffset by an increase of $0.2 million in trade show and user conferenceexpenses and investor relations expense.

 

**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 increased $0.1 million or 5.6% anddecreased $0.2 million or 4.0% for the three and nine months ended September30, 2002, respectively, as compared to the corresponding prior yearperiods.  We capitalized $0.5 million insoftware development costs for the nine month period of 2002 as compared to$0.8 million for the same period in 2001. The rate of capitalization of software development costs may fluctuatedepending on the mix and stage of development of our product development andengineering projects.  The increase inresearch and development costs for the three months ended September 30, 2002 isprimarily the result of an increase of $0.1 million in personnel relatedexpenses due to a decrease in the amount of capitalized software developmentcosts for the period as compared to the same period in 2001.  The decrease for the nine months endedSeptember 30, 2002 is primarily the result of a decrease of $0.2 million inbonus compensation expense.

 

**Generaland Administrative**

 

General and administrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outside professionalfees.  General and administrativeexpenses decreased $0.4 million and $3.0 million or 22.5% and 47.2% for thethree and nine months ended September 30, 2002, respectively, as compared tothe corresponding prior year periods. The decrease for the three and nine months ended September 30, 2002 isprimarily as a result of a decrease of $0.1 million and $1.2 million,respectively, in professional fees resulting primarily from lower legal costs,a decrease of $0.1 million and $0.8 million, respectively, in personnel relatedcosts due to a decrease in headcount and a decrease of $0.1 million and $0.2million, respectively, in rent expense due to office closings and downsizing ofrental space.  The decrease for the ninemonth period is also the result of a decrease of $0.1 million in bonus expenseand a decrease in bad debt expense of $0.1 million resulting from a bad debtrecovery with one customer.

 

Legal fees amounted to $0.8 million for the ninemonths ended September 30, 2001.  TheSecurities and Exchange Commission (SEC) performed an investigation of AXS-Oneand of certain of our former employees and officers relating to activitiesperformed through 1996 while they were our employees.  We filed a Form 8-K with the SEC on February 15, 2001 disclosingthe SEC investigation 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 nine months ended September 30, 2001.  During the second quarter of 2002 approximately $0.3 million ofthese charges were reversed due to favorable settlements of outstandingbillings with legal firms.  The Companydoes not anticipate any further costs relating to this matter.

 

21

----

 

**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, weeliminated 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 lease costs.  During the third and fourth quarters of2001, we adjusted downward the charge to operations by approximately $(0.2)million and $(0.1) million respectively, reflecting revised termination andlease costs.  These revisionsresulted from management’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:

 
| **(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 September 30, 2002                              |   | $                               | — |                                                                              | $      | —           |   | $                | — |   | $ | — |   |

 

**OtherIncome (Expense)**

 

Other income (expense), net decreased $(39) thousand for the threemonths ended September 30, 2002 and increased $(74) thousand for the ninemonths ended September 30, 2002 as compared to the corresponding prior yearperiods.  The decreased expense for thethree month period is primarily due to an increase of $149 thousand in the gainon the sale of our subsidiary partially offset by an increase of $(76) thousandof equity in losses related to two joint ventures entered into during the firstquarter of 2001 by our South Africa operations.  The increase for the nine months ended September 30, 2002 isprimarily due to an increase of $300 thousand in equity in losses in jointventures mostly offset by the gain on the sale of our subsidiary of $219thousand.  Interest expense relates tothe interest on the revolving line of credit and term loan. (See Note 2 to theConsolidated Interim Financial Statements.)

 

**SegmentInformation**

 

For the three and nine months ended September 30, 2002 the AXS-OneEnterprise Solutions segment had license fee revenues of $0.2 million and $1.1million, respectively, compared to $0.7 million and $3.2 million, respectively,for the comparable prior year periods; services revenue of $6.4 million and$19.4 million, respectively, compared to $7.0 million and $21.5 million,respectively, for the comparable prior year periods; and operating income of$0.7 million and $2.4 million, respectively, compared to $1.9 million and $2.0million, respectively, for the comparable prior year periods.  License fees were higher for the nine monthsended September 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

 

22

----

 

2002 as well as the sale of our subsidiary located in C.E.E which hadapproximately $1.2 million in services revenue for the nine months endedSeptember 30, 2001.  Services revenue forthe three months ended September 30, 2002 decreased $0.3 million over thecorresponding prior year period when excluding prior year revenues of $0.3million from C.E.E.  Operating incomefor the three months ended September 30, 2002 decreased $1.1 million from thecorresponding prior year period primarily as a result of a $1.0 milliondecrease in total revenue.

 

The AXSPoint Solutions segment had license fee revenues of $0.8 millionand $1.6 million for the three and nine months ended September 30, 2002,respectively, compared to $0.1 million and $0.6 million, respectively, for thecomparable prior year periods; service revenues of $1.0 million and $3.2million, respectively, compared to $1.2 million and $3.2 million, respectively,for the comparable prior year periods; and operating income of $1.2 million and$2.8 million, respectively, as compared to $0.5 million and $0.7 million,respectively, for the comparable prior year periods.  The increase in license revenues was mainly due to sales of newproducts to three existing customers.

 

Tivity Solutions had license fee revenues of $23 thousand and $0.3million, respectively, for the three and nine months ended September 30, 2002,as compared to $18 thousand and $0.2 million, respectively, for the comparableprior year periods; service revenues of $0.7 million and $2.0 million,respectively, as compared to $0.8 million and $2.5 million, respectively, forthe comparable prior year periods; and operating income (loss) of $0.2 millionand $0.2 million, respectively, as compared to $49 thousand and $(0.7)million.  The increase in license feerevenue for the nine months ended September 30, 2002 from the correspondingprior year period was primarily due to a license sale to one customer in theU.S.  The decrease in services revenuefor the nine months ended September 30, 2002 as compared to the correspondingprior year period was the result of a decrease in consulting revenue due todecreased 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, due to the restructuring in the second quarter of 2001resulting in lower headcount.

 

**CriticalAccounting Policies**

 

Our critical accounting policies are as follows:

 

•  Revenuerecognition and

 

•  Capitalizedsoftware 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 a

 

23

----

 

professional services agreement as evidence of an arrangement for ourtraining, custom programming and consulting revenues.  Management fee revenues from our joint ventures are evidenced bymaster agreements governing the relationship.

 

We recognize revenue in accordance with Statement of Position 97-2, “SoftwareRevenue 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 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.

 

For these revenue transactions, we assess whether the fee is fixed anddeterminable and whether or not collection is reasonably assured.  We assess whether the fee is fixed anddeterminable based on the payment terms associated with the transaction.  If a significant portion of a fee is dueafter our normal payment terms, which are 30 to 90 days from invoice date, weaccount for the fee as not being fixed and determinable.  In these cases, we recognize revenue as thefees become due.

 

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 perform significantwork either to alter the underlying software or to build additional complexinterfaces so that the software performs as the customer requests, we recognizethe 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-Related Parties in the ourConsolidated Statements of Operations) includes consulting revenue for thejoint ventures’ use of AXS-One’s South African subsidiary’s consultants and formanagement fees from AXS-One’s subsidiary providing managerial, technical andother related services to the joint ventures in accordance with the jointventure agreements.  Revenue is recognizedupon performance of the services.

 

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 wedetermine that collection of a fee is not reasonably assured, we defer the feeand recognize revenue at the time collection becomes reasonably assured, whichis generally upon receipt of cash.

 

Our arrangements do not usually include acceptance clauses.  However, if an arrangement includes anacceptance provision, acceptance generally occurs upon the earlier of receiptof a written 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

 

24

----

 

project are capitalized until the product is available for generalrelease to customers.  The establishmentof technological feasibility and the ongoing assessment of recoverability ofcapitalized software development costs require considerable judgment bymanagement with respect to certain external factors, including, but not limitedto, anticipated future revenues, estimated economic life and changes intechnology.  It is reasonably possiblethat estimates of anticipated future revenues, the remaining estimated economiclife of the products, 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.

 

**Liquidityand Capital Resources**

 

There were no amounts available under the revolving line of credit atSeptember 30, 2002 since we had borrowed the maximum amount allowed by the bankof $1.5 million.  The available amountunder the term loans at September 30, 2002 was $1.0 million.  Effective August 8, 2002, we further amendedthe Agreement (See Note 2 to the Consolidated Interim Financial Statements) tomake available an additional term loan in the original principal amount of upto $1.5 million of which we borrowed $250 thousand on August 21, 2002 and $250thousand on September 13, 2002 and transferred $500 thousand of debt from therevolver to the term loan on October 1, 2002.

 

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 $0.9 million and $0.5 million forthe nine months ended September 30, 2001 and 2002, respectively.  Net cash used by operations during the ninemonths ended September 30, 2001 was comprised primarily of the net losspartially offset by depreciation and amortization expense, a decrease in accountsreceivable and an increase in deferred revenue.  Net cash used by operating activities during the nine monthsended September  30, 2002 was comprisedprimarily of an increase in accounts receivable, a decrease in accounts payableand accrued expenses and a decrease in deferred revenue partially offset by thenet income and depreciation and amortization expense.

 

Our investing activities used cash of $1.2 million and $0.8 million forthe nine months ended September 30, 2001 and 2002, respectively. The principaluses during 2001 were for equipment purchases, leasehold improvements andcapitalized software development costs. For the nine months ended September 30, 2002 uses of cash were primarilyfor capitalized software development costs, equipment purchases and loans tojoint ventures, partially offset by proceeds from sale of subsidiary.

 

Cash provided by financing activities was $0.7 million and $0.7 millionfor the nine months ended September 30, 2001 and 2002, respectively, andrelated mainly to proceeds from the issuance of debt offset by repayments ofdebt for both periods presented.

 

We have no significant capital commitments.  Planned capital expenditures for 2002 totalapproximately $1.0 million, including any software development costs that may qualifyfor capitalization under SFAS 86.  Ouraggregate minimum operating lease payments for 2002 will be approximately $1.6million.  We have experiencedrecurring net losses of $3.7 million, $0.3 million and $4.7 million during theyears ended December 31, 1999, 2000 and 2001, respectively.  Additionally, as a result of intensecompetition and rapid technological change together with the slowing economy wehave 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

 

25

----

 

better position AXS-One to compete under current market conditions.  Thisincluded, but was not limited to, our restructuring effort in June, 2001 (SeeNote 5: Restructuring and Other Costs) whereby we were able to reduce costssufficiently to allow us to generate net income of $2.6 million for the fifteenmonths ended September 30, 2002.  Due tothese efforts, we expect that our operating cash flow and available financialresources will be sufficient to fund our working capital requirements through2002.  However, our ability to achievethe anticipated results is affected by the extent of cash generated fromoperations and the pace at which we utilize our available resources.  There is also the risk that cash held by ourforeign subsidiaries will not be readily available in our U.S. operations topay our debt and other obligations as the transfer of funds is subject tovarious foreign government restrictions. Accordingly, we may in the future be required to seek additional sourcesof financing or future accommodations from our existing lender.  No assurance can be given that management’sinitiatives will be successful or that any such additional sources of financingor lender accommodations will be available.

 

**Item 3.****Quantitative and Qualitative Disclosures About Market Risk**

 

In the normal course of business, we are exposed tofluctuations in interest rates and equity market risks as we seek debt andequity capital to sustain our operations. We are also exposed to fluctuations in foreign currency exchange ratesas the financial results and financial conditions of our foreign subsidiariesare translated into U.S. dollars in consolidation.  We do not use derivative instruments or hedging to manage ourexposures and do not currently hold any market risk sensitive instruments fortrading 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 riskfactors.

 

**Item 4.****Controlsand Procedures**

 

***Evaluation of disclosure controls andprocedures***

 

Our chief executive officer and our chief financial officer, afterevaluating the effectiveness of our “disclosure controls and procedures” (asdefined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))as of a date (the “Evaluation Date”) within 90 days before the filing date ofthis quarterly report, have concluded that as of the Evaluation Date, ourdisclosure controls and procedures were adequate and designed to ensure thatmaterial information relating to us and our consolidated subsidiaries would bemade known to them by others within those entities as appropriate to allowtimely decisions regarding required disclosure of such information.

 

***Changes in internal controls***

 

There were no significant changes in our internal controls or, to ourknowledge, in other factors that could significantly affect our disclosurecontrols and procedures subsequent to the Evaluation Date.

 

26

----

 

**AXS-ONE INC.**

Part II

Other Information

 

**Item 1.****LegalProceedings**

 

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.

 

**Item 6.****Exhibitsand Reports on Form 8-K**

 

(a) Exhibits - None

 

(b) Reports on Form 8-K -None

 

27

----

 

**AXS-ONE INC.**

 

 

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:**  November 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) |

 

28

----

 

CERTIFICATION

 

I, John A. Rade, certify that:

 

1. I have reviewed this quarterly report on Form10-Q of AXS-One Inc.;

 

2. Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6. The registrant’s other certifying officers andI have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 13, 2002 |
|-------------------------------|
|                          | /s/    John A. Rade |   |
|                          | John A. Rade |
|                          | Chief Executive Officer |
|                          | President and Director |

 

29

----

 

CERTIFICATION

 

I, William G. Levering, certify that:

 

1. I have reviewed this quarterly report on Form10-Q of AXS-One Inc.;

 

2. Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have identifiedfor the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6. The registrant’s other certifying officers andI have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 13, 2002 |
|-------------------------------|
|                          | /s/    William G. Levering III |   |
|                          | William G. Levering III |
|                          | Vice President, Chief Financial Officer,  and Treasurer |
|                          | (Duly Authorized  Officer and  Principal Financial Officer) |

 

30

----