**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarter ended June 30, 2003**

 

**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 telephone  number, including area code)       |

 

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

 

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

 

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 shares outstanding of the issuer’s commonstock as of August 4, 2003

 

| **Class**                                |   | **Number of Shares Outstanding** |
|------------------------------------------|--------|----------------------------------|
| Common Stock, par value  $0.01 per share |   | 24,959,742                       |

 

 

----

 

**AXS-ONE INC.**

 

**INDEX**

 
| **PART I**     | **FINANCIAL  INFORMATION** |
|----------------|----------------------------|
|           |                       |   |
|           | Item 1.                    | Financial  Statements |
|           |                       |   |
|           |                       | Consolidated Balance Sheets  December 31, 2002 and June 30, 2003 (unaudited) |
|           |                       | Consolidated  Statements of Operations (unaudited)  Three and six months ended June 30, 2002 and 2003 |
|           |                       | Consolidated  Statements of Comprehensive Income (unaudited)  Three and six months ended June 30, 2002 and 2003 |
|           |                       | Consolidated  Statements of Cash Flows (unaudited)  Three and six months ended June 30, 2002 and 2003 |
|           |                       | 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  4.                   | Submission  of Matters to a Vote of Security Holders |
|           |                       |
|           | Item 6.                    | Exhibits and  Reports on Form 8-K |
|           |                       |
| **SIGNATURES** |
|           |
|           | Signatures                 |
|                |                            |  |  |

 

2

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**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                                                           |   | **December 31,  2002** |   | **June 30,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------------------|--------|
| **ASSETS**                                                                                                                                                     |   |                   |   |               |   |
| Current assets:                                                                                                                                                |   |                   |   |               |   |
| Cash and cash  equivalents                                                                                                                                     |   | $                      | 2,702  |               | $      | 1,156 |   |
| Restricted cash                                                                                                                                                |   | 67                     |   | 48                 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $379 and $174 at  December 31, 2002 and June 30, 2003, respectively                            |   | 3,866                  |   | 4,495              |   |
| Due from joint  venture                                                                                                                                        |   | 345                    |   | 128                |   |
| Prepaid expenses  and other current assets                                                                                                                     |   | 706                    |   | 636                |   |
| Total current  assets                                                                                                                                          |   | 7,686                  |   | 6,463              |   |
| Equipment and  leasehold improvements, at cost:                                                                                                                |   |                   |   |               |   |
| Computer and  office equipment                                                                                                                                 |   | 10,687                 |   | 10,883             |   |
| Furniture and  fixtures                                                                                                                                        |   | 857                    |   | 904                |   |
| Leasehold  improvements                                                                                                                                        |   | 860                    |   | 863                |   |
|                                                                                                                                                           |   | 12,404                 |   | 12,650             |   |
| Less–accumulated  depreciation and amortization                                                                                                           |   | 12,035                 |   | 12,301             |   |
|                                                                                                                                                           |   | 369                    |   | 349                |   |
| Capitalized  software development costs, net of accumulated amortization of $8,177 and  $8,851 at December 31, 2002 and June 30, 2003, respectively            |   | 2,378                  |   | 2,358              |   |
| Other assets                                                                                                                                                   |   | 166                    |   | 191                |   |
|                                                                                                                                                           |   | $                      | 10,599 |               | $      | 9,361 |   |
|                                                                                                                                                           |   |                   |   |               |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                                |   |                   |   |               |   |
| Current  liabilities:                                                                                                                                          |   |                   |   |               |   |
| Current portion  of long-term debt                                                                                                                             |   | $                      | 1,800  |               | $      | 1,447 |   |
| Accounts payable                                                                                                                                               |   | 2,304                  |   | 1,446              |   |
| Accrued expenses                                                                                                                                               |   | 2,973                  |   | 2,617              |   |
| Due to joint  venture                                                                                                                                          |   | 179                    |   | —             |   |
| Deferred revenue                                                                                                                                               |   | 8,821                  |   | 9,220              |   |
| Total current  liabilities                                                                                                                                     |   | 16,077                 |   | 14,730             |   |
| Long-term  liabilities:                                                                                                                                        |   |                   |   |               |   |
| Long-term debt,  net of current portion                                                                                                                        |   | 547                    |   | —             |   |
| 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; 24,849 and 24,960 shares issued and  outstanding at December 31, 2002 and June 30, 2003, respectively |   | 248                    |   | 250                |   |
| Additional  paid-in capital                                                                                                                                    |   | 72,052                 |   | 72,104             |   |
| Accumulated  deficit                                                                                                                                           |   | (78,769                | )      | (78,187            | )      |
| Accumulated  other comprehensive income                                                                                                                        |   | 444                    |   | 464                |   |
| Total  stockholders’ deficit                                                                                                                              |   | (6,025                 | )      | (5,369             | )      |
|                                                                                                                                                           |   | $                      | 10,599 |               | $      | 9,361 |   |

 

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

 

3

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**AXS-ONEINC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                |   | **June 30,  2002**      |   | **June 30,  2003**    |   | **June 30,  2002** |   | **June 30,  2003** |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Revenues:                                           |   |                    |   |                  |   |   |   |   |   |
| License fees                                        |   | $                       | 740    |                  | $      | 1,354 |   | $ | 1,924 |   | $ | 2,595 |   |
| Services                                            |   | 8,522                   |   | 8,160                 |   | 16,346 |   | 16,249 |   |
| Other - related  parties                            |   | 101                     |   | 74                    |   | 189 |   | 189 |   |
| Total revenues                                      |   | 9,363                   |   | 9,588                 |   | 18,459 |   | 19,033 |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Operating expenses:                                 |   |                    |   |                  |   |   |   |   |   |
| Cost of license  fees                               |   | 337                     |   | 378                   |   | 702 |   | 719 |   |
| Cost of services                                    |   | 3,888                   |   | 4,003                 |   | 7,695 |   | 7,967 |   |
| Sales and  marketing                                |   | 1,920                   |   | 2,124                 |   | 3,436 |   | 3,755 |   |
| Research and  development                           |   | 1,710                   |   | 1,578                 |   | 3,426 |   | 3,252 |   |
| General and  administrative                         |   | 1,056                   |   | 1,348                 |   | 2,121 |   | 2,663 |   |
| Total operating  expenses                           |   | 8,911                   |   | 9,431                 |   | 17,380 |   | 18,356 |   |
| Operating income                                    |   | 452                     |   | 157                   |   | 1,079 |   | 677 |   |
| Other income  (expense):                            |   |                    |   |                  |   |   |   |   |   |
| Interest income                                     |   | 10                      |   | 20                    |   | 23 |   | 32 |   |
| Interest expense                                    |   | (88                     | )      | (46                   | )      | (175 | ) | (119 | ) |
| Gain on sale of  subsidiary                         |   | 51                      |   | —                |   | 70 |   | 71 |   |
| Equity in income  (losses) of joint ventures        |   | (200                    | )      | 134                   |   | (297 | ) | 115 |   |
| Other expense,  net                                 |   | (46                     | )      | (82                   | )      | (124 | ) | (166 | ) |
| Other income  (expense), net                        |   | (273                    | )      | 26                    |   | (503 | ) | (67 | ) |
| Net income  before income taxes                     |   | 179                     |   | 183                   |   | 576 |   | 610 |   |
| Income tax  expense                                 |   | —                  |   | (28                   | )      | — |   | (28 | ) |
| Net income                                          |   | $                       | 179    |                  | $      | 155 |   | $ | 576 |   | $ | 582 |   |
|                                                |   |                    |   |                  |   |   |   |   |   |
| Basic net income  per common share                  |   | $                       | 0.01   |                  | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |
| Weighted average  basic common shares outstanding   |   | 24,804                  |   | 24,960                |   | 24,798 |   | 24,913 |   |
| Diluted net  income per common share                |   | $                       | 0.01   |                  | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |
| Weighted average  diluted common shares outstanding |   | 25,673                  |   | 25,462                |   | 25,764 |   | 25,773 |   |

 

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

 

4

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(In thousands)**

**(Unaudited)**

 
|                                   |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                   |   | **June 30,**            |   | **June 30,**          |   |
|                                   |   | **2002**                |   | **2003**              |   | **2002** |   | **2003** |   |
|                                   |   |                    |   |                  |   |   |   |   |   |
| Net income                             |   | $                       | 179    |                  | $      | 155 |   | $ | 576 |   | $ | 582 |   |
| Foreign curency translation adjustment |   | 75                      |   | (14                   | )      | 87 |   | 20 |   |
| Comprehensive income                   |   | $                       | 254    |                  | $      | 141 |   | $ | 663 |   | $ | 602 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**AXS-ONEINC. AND SUDSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                |   | **Six Months  Ended June 30,** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                |   | **2002**                       |   | **2003** |   |
|                                                                                |   |                           |   |   |   |
| Cash flows from  operating activities:                                              |   |                           |   |   |   |
| Net income                                                                          |   | $                              | 576    |   | $ | 582 |   |
| Adjustments to  reconcile net income to net cash flows used in operating activities |   |                           |   |   |   |
| Increase in cash  surrender value of officers’ life insurance                  |   | (38                            | )      | (14 | ) |
| Depreciation and  amortization                                                      |   | 1,019                          |   | 820 |   |
| Net recovery of  doubtful accounts                                                  |   | (108                           | )      | (132 | ) |
| Gain on sale of  subsidiary                                                         |   | (70                            | )      | (71 | ) |
| Equity in  (income) losses of joint ventures                                        |   | 297                            |   | (115 | ) |
| Consulting  services received in lieu of payment on note receivable                 |   | 140                            |   | — |   |
| Consulting services  received in lieu of payment on accounts receivable             |   | —                         |   | 45 |   |
| Changes in  current assets and liabilities                                          |   |                           |   |   |   |
| Restricted cash                                                                     |   | (22                            | )      | 27 |   |
| Accounts  receivable                                                                |   | (1,426                         | )      | (333 | ) |
| Due from joint  venture                                                             |   | (187                           | )      | 217 |   |
| Prepaid expenses  and other current assets                                          |   | (201                           | )      | 99 |   |
| Accounts payable  and accrued expenses                                              |   | (785                           | )      | (1,393 | ) |
| Deferred revenue                                                                    |   | 512                            |   | 260 |   |
| Net cash flows  used in operating activities                                        |   | (293                           | )      | (8 | ) |
|                                                                                |   |                           |   |   |   |
| Cash flows from  investing activities:                                              |   |                           |   |   |   |
| Change in other  assets                                                             |   | (6                             | )      | 18 |   |
| Proceeds from  sale of subsidiary                                                   |   | 16                             |   | — |   |
| Loan to joint  venture                                                              |   | (104                           | )      | (82 | ) |
| Capitalized  software development costs                                             |   | (395                           | )      | (654 | ) |
| Purchase of  equipment and leasehold improvements                                   |   | (46                            | )      | (103 | ) |
| Net cash flows  used in investing activities                                        |   | (535                           | )      | (821 | ) |
|                                                                                |   |                           |   |   |   |
| Cash flows from  financing activities:                                              |   |                           |   |   |   |
| Proceeds from  exercise of stock options                                            |   | 6                              |   | 54 |   |
| Net borrowings  from revolving line of credit                                       |   | 1,124                          |   | — |   |
| Payments of  long-term debt                                                         |   | (900                           | )      | (900 | ) |
| Net cash flows  provided by (used in) financing activities                          |   | 230                            |   | (846 | ) |
| Foreign currency  exchange rate effects on cash and cash equivalents                |   | 201                            |   | 129 |   |
| Net decrease in  cash and cash equivalents                                          |   | (397                           | )      | (1,546 | ) |
| Cash and cash  equivalents, beginning of period                                     |   | 1,048                          |   | 2,702 |   |
| Cash and cash  equivalents, end of period                                           |   | $                              | 651    |   | $ | 1,156 |   |
|                                                                                |   |                           |   |   |   |
| Supplemental  disclosures of cash flow information:                                 |   |                           |   |   |   |
| Cash paid during  the period for -                                                  |   |                           |   |   |   |
| Interest                                                                            |   | $                              | 180    |   | $ | 134 |   |
| Income taxes                                                                        |   | $                              | 9      |   | $ | 107 |   |
|                                                                                |   |                           |   |   |   |
| Non-cash  investing activities -                                                    |   |                           |   |   |   |
| Consulting  services received in lieu of payment on note receivable                 |   | $                              | 140    |   | $ | — |   |

 

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

 

6

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

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

**(Unaudited)**

 

**(1)OPERATIONS, BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

The Company designs, markets and supports n-tier, Internet-enabled,client/server, e-business, 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. and its wholly owned subsidiaries located in Australia, Canada,Singapore, South Africa, and the United Kingdom (collectively, the *“Company*”).  All significant intercompany transactionsand balances have been eliminated. During the first quarter of 2001, the Company’s South Africa operationsentered into two joint ventures. Ownership was 50% or less in both entities until November 30, 2002, atwhich time the Company acquired, for a nominal amount, the remaining 50% of thecommon stock of one of the entities, Hospitality Warehouse, to make it a wholly-ownedsubsidiary.  All significantintercompany transactions and balances have been eliminated.  The Company uses the equity method ofaccounting for its joint venture that it owns between 20 and 50%.  Under the equity method, investments arestated at cost plus or minus the Company’s equity in undistributed earnings orlosses.

 

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 2002 Annual Report on Form 10-K filed with the Securities andExchange Commission.

 

The results of operations for the three and six months ended June 30,2003 are not necessarily indicative of results to be expected for the full year2003 or any future periods.

 

(b) *RevenueRecognition*

 

The Company recognizes revenue in accordance with Statement of Position97-2, “Software Revenue Recognition” (“SOP 97-2”), and Statement of Position98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.”  Revenue fromnon-cancelable software licenses is recognized when the license agreement hasbeen signed, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.  In multipleelement arrangements, the Company defers the vendor-specific objective evidenceof fair value (“VSOE”) related to the undelivered elements and recognizesrevenue on the delivered elements using the residual method.  The most commonly deferred element isinitial maintenance, which is recognized on a straight-line basis over theinitial maintenance 

 

7

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term.  The VSOE of maintenanceis determined by using a consistent percentage of maintenance fee to licensefee based on renewal rates.  Maintenancefees in subsequent years are recognized on a straight-line basis over the lifeof the applicable agreement.  Deliveryof software generally occurs when the product (on CDs) is delivered to a commoncarrier.

 

For software license and maintenance revenue, the Company assesseswhether the fee is fixed and determinable and whether or not collection isprobable.  The Company assesses whetherthe fee is fixed and determinable based on the payment terms associated withthe transaction.  If a significantportion of a fee is due after the Company’s normal payment terms, which are 30to 90 days from invoice date, 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. Anticipated losses, if any, are charged to operations in the period suchlosses are determined.

 

Revenues from joint ventures (included in Revenues: Other-RelatedParties in the Company’s Consolidated Statements of Operations) includesconsulting revenue for the joint venture’s use of the Company’s South Africansubsidiary’s consultants (2003 only) and for management and director’s feesarising from the Company’s South African subsidiary providing managerial,technical and other related services to the joint ventures (2002 and 2003periods) in accordance with the joint venture agreements.  Revenue is recognized upon performance ofthe 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 probable, it defers the fee and recognizes revenue at the timecollection becomes probable, which is generally upon receipt of cash.

 

The Company adopted EITF Issue No. 01-14, “Income StatementCharacterization of Reimbursement Received for ‘Out of Pocket’ ExpensesIncurred” on January 1, 2002. Accordingly, reimbursements received for out-of-pocket expenses incurredare classified as revenue in the unaudited consolidated statements ofoperations.

 

(c) Stock-Based Compensation

 

In December 2002, the FASB issued Statement No. 148, “Accounting forStock Based Compensation-Transition and Disclosure, an Amendment of FASBStatement No. 123” (“SFAS 148”).  SFAS148 amends FASB Statement No. 123, “Accounting for Stock-based Compensation”(“SFAS 123”), to provide alternative methods of transition for a voluntarychange to the fair value method of accounting

 

8

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for stock-based compensation. However, it allows an entity to continue to measure compensation costfor those instruments using the intrinsic-value method of accounting prescribedby Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for StockIssued to Employees,” provided it discloses the effect of SFAS 123, as amendedby SFAS 148, in footnotes to the financial statements.  On April 22, 2003, the FASB decided torequire stock-based employee compensation to be recorded as a charge toearnings beginning in 2004.  Until thattime, the Company has chosen to continue to account for stock-basedcompensation using the intrinsic value method. Accordingly, no stock option related compensation expense has beenrecognized in the consolidated statements of operations, as all options grantedhad an exercise price equal to the market value of the underlying stock on thedate of grant.  The Company was requiredto adopt SFAS 148 for the year ended December 31, 2002.  The adoption of SFAS 148 did not have animpact on the 2002 consolidated results of operations or financial position ofthe Company and is not expected to have an impact on the consolidated resultsof operations or financial position of the Company through 2003 as the Companyexpects to continue to apply the intrinsic value method prescribed by APB 25until such time as the new standard is issued by the FASB.

 

Had the Company, however, elected to recognize compensation cost basedon fair value of the stock options at the date of grant under SFAS 123, asamended by SFAS 148, such costs would have been recognized ratably over thevesting period of the underlying instruments and the Company’s net income andnet income per common share would have changed to the pro forma amountsindicated in the table below.

 
|                                                                                                     |   | **Three Months  Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                     |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
|                                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Net income as reported                                                                                   |   | $                                 | 179    |                            | $      | 155 |   | $ | 576 |   | $ | 582 |   |
| Deduct: Total stock based employee compensation determined under fair  value based method for all awards |   | 424                               |   | 334                             |   | 877 |   | 722 |   |
| Pro forma net loss                                                                                       |   | $                                 | (245   | )                               | $      | (179 | ) | $ | (301 | ) | $ | (140 | ) |
|                                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Net income (loss) per common share:                                                                      |   |                              |   |                            |   |   |   |   |   |
| Basic - as reported                                                                                      |   | $                                 | 0.01   |                            | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |
| Basic - pro forma                                                                                        |   | (0.01                             | )      | (0.01                           | )      | (0.01 | ) | (0.01 | ) |
|                                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Diluted- as reported                                                                                     |   | $                                 | 0.01   |                            | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |
| Diluted - pro forma                                                                                      |   | (0.01                             | )      | (0.01                           | )      | (0.01 | ) | (0.01 | ) |

 

The Company has used the Black-Scholes option-pricingmodel in calculating the fair value of options granted.  The assumptions used and the weightedaverage information for the three and six

 

9

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months ended June 30, 2002 and 2003 are as follows:

 
|                                                                                                             |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                             |   | **2002**                         |   | **2003**                       |   | **2002** |   | **2003** |   |
|                                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Risk-free  interest rate                                                                                         |   | 5.52                             | %      | 4.57                           | %      | 5.52 | % | 4.57 | % |
| Expected  dividend yield                                                                                         |   | —                           |   | —                         |   | — |   | — |   |
| Expected lives                                                                                                   |   | 7 years                          |   | 7 years                        |   | 7 years |   | 7 years |   |
| Expected  volatility                                                                                             |   | 137                              | %      | 64                             | %      | 137 | % | 64 | % |
| Weighted-average  grant date fair value of options granted during the period                                     |   | $                                | 0.87   |                           | $      | 0.79 |   | $ | 0.87 |   | $ | 0.78 |   |
| Weighted-average  remaining contractual life of options outstanding                                              |   | 7.2 years                        |   | 6.8 years                      |   | 7.2 years |   | 6.8 years |   |
| Weighted-average  exercise price of 3,647 and 3,758 options exercisable at June 30, 2002 and  2003, respectively |   | $                                | 1.62   |                           | $      | 1.77 |   | $ | 1.62 |   | $ | 1.77 |   |

 

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

 

On March 31, 1998, the Company entered into a Loan and SecurityAgreement (“Agreement”) that 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 in yearone, $86 in years two and three, $77 in year four, $74 in years five and sixand (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 ofcredit the Company currently has available the lesser of $5 million or 85% ofeligible receivables, as defined.  Thenet available amount under the revolving line of credit at June 30, 2003 wasapproximately $0.5 million of which no amounts were outstanding.

 

The Initial Term Loan provided for $5 million available in onedraw-down which the Company borrowed on the closing date in 1998.  Effective December 22, 1999, the Companyamended the Agreement (Amendment No. 7) in order to make available to theCompany a second term loan in the original principal amount of $1.3 million,which the Company borrowed on that date. The Initial Term Loan and the secondterm loan, collectively the “A Term Loan,” bore interest at the prime rate asdefined (4.25%

 

10

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per annum at June 30, 2003) plus 1.5% subject to a minimum interestrate of 8.0% per annum.  The A Term Loanwas fully repaid in June 2002 and no amounts remain outstanding.

 

Amendment No. 7 also made available a third term loan (the “B TermLoan”) in the original principal amount of $750, which the Company borrowed infull.  The B Term Loan bears interest atthe fixed rate of 12.0% per annum.

 

Subsequent amendments to the Agreement made available additional ‘B’term loans in the original principal amounts totaling up to $4.5 million, ofwhich the Company has borrowed $4.0 million, extended the termination date ofthe credit facility to March 31, 2004 and established restrictive financialcovenants (which are quarterly for 2003) based on cumulative EBITDA (earningsbefore interest, taxes and depreciation and amortization).  The Company was in compliance with thesecovenants through June 30, 2003.  Theamount available under the ‘B’ term loans at June 30, 2003 was $500.  (For further information see Note 3 to theCompany’s 2002 Annual Report on Form 10-K.)

 

The aggregate outstanding principal amount of the Term Loans isrepayable in monthly installments of $150 beginning September 2002 over theremaining term of the Agreement.  Anyunpaid principal and interest is due in full on March 31, 2004.

 

Amendment No. 12 provides a limitation that if the total outstandingbalance of the Term Loans exceeds at any time the lesser of (i) 40% of eligiblemaintenance revenues from August 8, 2002 through December 31, 2002, 25% ofeligible maintenance revenues from January 1, 2003 through March 31, 2004 and(ii) $4.5 million, then the Company is required to prepay the principal amountin an amount sufficient to cause the aggregate principal amount of the TermLoans to be less than or equal to the relevant limits set forth above.  As of June 30, 2003, eligible maintenancerevenues as defined, totaled approximately $12.1 million.

 

**(3)BASIC AND DILUTED NET INCOME PER COMMON SHARE**

 

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

 

Basic net income per common share is based on the weighted averagenumber of shares of common stock outstanding during the period.  Diluted net income per common share for thethree and six months ended June 30, 2002 does not include the effects ofoutstanding options to purchase 3,612 and 3,570, respectively, shares of commonstock and outstanding warrants to purchase 476 shares of common stock for eachperiod as the effect of their inclusion is anti-dilutive for the periods.  Diluted net income per common share for thethree and six months ended June 30, 2003 does not include the effects ofoutstanding options to purchase 3,240 shares of common stock for both periodsand outstanding warrants to purchase, for both periods, 100 shares of commonstock as the effect of their inclusion is anti-dilutive for the periods.

 

The following represents the calculations of the basic and diluted netincome per common share for the three and six months ended June 30, 2002 and2003.

 

11

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|                                                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                   |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Net income                                                             |   | $                                 | 179    |                            | $      | 155 |   | $ | 576 |   | $ | 582 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Weighted average  basic common shares outstanding during the periods   |   | 24,804                            |   | 24,960                          |   | 24,798 |   | 24,913 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Dilutive effect  of stock options and warrants                         |   | 869                               |   | 502                             |   | 966 |   | 860 |   |
| Weighted average  diluted common shares outstanding during the periods |   | 25,673                            |   | 25,462                          |   | 25,764 |   | 25,773 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Basic net income  per common share                                     |   | $                                 | 0.01   |                            | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |
|                                                                   |   |                              |   |                            |   |   |   |   |   |
| Diluted net  income per common share                                   |   | $                                 | 0.01   |                            | $      | 0.01 |   | $ | 0.02 |   | $ | 0.02 |   |

 

**(4) OPERATING SEGMENTS**

 

The Company has three product lines that it offers to specific marketsas part of its strategy to focus on market opportunities.  The three product lines are as follows:

 

a)              AXS-One® EnterpriseSolutions provide Enterprise Solutions to global 2000 companies that enableorganizations to achieve process transparency throughout their valuechain.  These include AXS-One’sFoundation products for which the Company has an extensive installed base ofcustomers.

 

b)             AXSPoint® Solutionsfocus on identifying markets that need to rapidly leverage the Internet incommunicating, exchanging or reconciling large volumes of knowledge with theircustomers, suppliers and partners. AXSPoint Solutions target large information-centric organizations thatcan utilize self-service information systems to improve communications withtheir customers and improve access to business intelligence.

 

c)              TivityTM Solutions, averticalized version of AXS-One Enterprise solutions, provide a full suite ofbusiness solutions and services to organizations that primarily sellprofessionals’ time.

 

The Company evaluates the performance of its product lines based onrevenues and operating income. Summarized financial information concerning the Company’s product linesis shown in the following table.  TheChief Executive Officer uses the information below in this format while makingdecisions about allocating resources to each product line and assessing itsperformance.

 

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|                                             |   | **AXS-One  Enterprise  Solutions** |   | **AXSPoint  Solutions** |   | **Tivity  Solutions** |   | **Total** |   |
|--------------------------------------------------|--------|------------------------------------|--------|-------------------------|--------|-----------------------|--------|-----------|--------|
| **Three  Months Ended June 30, 2002**            |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 361    |                    | $      | 370                   |   | $         | 9      |   | $ | 740 |   |
| Services                                         |   | 6,846                              |   | 1,045                   |   | 631                   |   | 8,522     |   |
| Total Revenues,  excluding related party revenue |   | 7,207                              |   | 1,415                   |   | 640                   |   | 9,262     |   |
| Operating income  (loss)                         |   | 860                                |   | 777                     |   | (81                   | )      | 1,556     |   |
| Total assets                                     |   | 8,995                              |   | 1,396                   |   | 653                   |   | 11,044    |   |
| Capital  expenditures                            |   | 27                                 |   | 2                       |   | 3                     |   | 32        |   |
| Depreciation and  amortization                   |   | 477                                |   | 7                       |   | 13                    |   | 497       |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Three  Months Ended June 30, 2003**            |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 859    |                    | $      | 495                   |   | $         | — |   | $ | 1,354 |   |
| Services                                         |   | 7,450                              |   | 206                     |   | 504                   |   | 8,160     |   |
| Total Revenues,  excluding related party revenue |   | 8,309                              |   | 701                     |   | 504                   |   | 9,514     |   |
| Operating income                                 |   | 650                                |   | 974                     |   | 45                    |   | 1,669     |   |
| Total assets                                     |   | 8,452                              |   | 735                     |   | 174                   |   | 9,361     |   |
| Capital  expenditures                            |   | 58                                 |   | 3                       |   | 6                     |   | 67        |   |
| Depreciation and  amortization                   |   | 416                                |   | 1                       |   | 6                     |   | 423       |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Six  Months Ended June 30, 2002**              |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 897    |                    | $      | 764                   |   | $         | 263    |   | $ | 1,924 |   |
| Services                                         |   | 12,961                             |   | 2,150                   |   | 1,235                 |   | 16,346    |   |
| Total Revenues,  excluding related party revenue |   | 13,858                             |   | 2,914                   |   | 1,498                 |   | 18,270    |   |
| Operating income                                 |   | 1,684                              |   | 1,598                   |   | 2                     |   | 3,284     |   |
| Total assets                                     |   | 8,995                              |   | 1,396                   |   | 653                   |   | 11,044    |   |
| Capital  expenditures                            |   | 38                                 |   | 4                       |   | 4                     |   | 46        |   |
| Depreciation and  amortization                   |   | 957                                |   | 30                      |   | 32                    |   | 1,019     |   |
|                                             |   |                               |   |                    |   |                  |   |      |   |
| **Six  Months Ended June 30, 2003**              |   |                               |   |                    |   |                  |   |      |   |
| Revenues:                                        |   |                               |   |                    |   |                  |   |      |   |
| License fees                                     |   | $                                  | 1,974  |                    | $      | 621                   |   | $         | — |   | $ | 2,595 |   |
| Services                                         |   | 12,920                             |   | 2,293                   |   | 1,036                 |   | 16,249    |   |
| Total Revenues,  excluding related party revenue |   | 14,894                             |   | 2,914                   |   | 1,036                 |   | 18,844    |   |
| Operating income  (loss)                         |   | 2,319                              |   | 1,387                   |   | (75                   | )      | 3,631     |   |
| Total assets                                     |   | 8,452                              |   | 735                     |   | 174                   |   | 9,361     |   |
| Capital  expenditures                            |   | 86                                 |   | 8                       |   | 9                     |   | 103       |   |
| Depreciation and  amortization                   |   | 794                                |   | 12                      |   | 14                    |   | 820       |   |

 

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Reconciliation of total segment operating income to consolidatedoperating income:

 
|                                              |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                              |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
|                                              |   |                              |   |                            |   |   |   |   |   |
| Operating income  from reportable segments        |   | $                                 | 1,556  |                            | $      | 1,669 |   | $ | 3,284 |   | $ | 3,631 |   |
| Unallocated  revenue, other –related parties |   | 101                               |   | 74                              |   | 189 |   | 189 |   |
| Unallocated  general and administrative expense   |   | (1,071                            | )      | (1,331                          | )      | (2,084 | ) | (2,642 | ) |
| Other corporate  unallocated expenses             |   | (134                              | )      | (255                            | )      | (310 | ) | (501 | ) |
| Total  consolidated operating income              |   | $                                 | 452    |                            | $      | 157 |   | $ | 1,079 |   | $ | 677 |   |

 

**(5) DIVESTITURE**

 

On September 20, 2001, the Company sold itswholly-owned subsidiary located in Central and Eastern Europe (C.E.E.),including offices in Poland, Estonia and Bulgaria, to Porterfield InternationalLtd. (“Buyer”), a company wholly-owned by the former managing director ofC.E.E. and his wife.  The Companyreceived consideration in the form of a promissory note of Buyer in the faceamount of $430 which was paid as of December 31, 2002.  A net asset deficiency of the C.E.E.operations of $(3), at the time of the sale, offset by accrued expenses of$180, directly related to the sale, resulted in a deferred gain ofapproximately $253, which the Company recorded in accordance with theSecurities and Exchange Commission’s Staff Accounting Bulletin No. 81 (SAB 81),“Gain Recognition on the Sale of a Business or Operating Assets to a HighlyLeveraged Entity.”  Additional directcosts of the sale of $3 and $5 recorded during the three months ended June 30,2002 and December 31, 2002, respectively, reduced the total deferred gain to$245.

 

The Company recognized such gain as the notereceivable was paid or equivalent value for services was received, but onlyafter $180 was received.  ThroughDecember 31, 2002, $430 had been received in either payment to the Company orequivalent services provided by the Buyer to the Company or to the Company’sjoint venture.  The Company recognized$219 of such gain through December 31, 2002, which included a reversal of $45related to the original $180 in accrued expenses recorded at the time of thesale.  The $45 was recognized during thethree months ended September 30, 2002 as a result of the release of a pastcustomer claim.  The remaining gain of$71, reflected as Deferred revenue on the accompanying December 31, 2002consolidated balance sheet, was recognized in February 2003 when the Companyreceived payment from the Company’s joint venture for services provided by theBuyer to the joint venture.  Thefollowing table shows the activity related to the promissory note and relateddeferred gain and gain recognized:

 
|                                                             |   | **Note  Receivable** |   | **Deferred  Gain** |   | **Gain  Recognized** |   |
|------------------------------------------------------------------|--------|----------------------|--------|--------------------|--------|----------------------|--------|
| Balance at  December 31, 2001                                    |   | $                    | 336    |               | $      | 253                  |   | $ | — |   |
| Direct expense  incurred in June 2002                            |   | —               |   | (3                 | )      | —               |   |
| Cash payments  and services received through December 31, 2002   |   | (336                 | )      | (174               | )      | 174                  |   |
| Reversal of  accrued expense in September 2002                   |   | —               |   | —             |   | 45                   |   |
| Direct expense  incurred in October 2002                         |   | —               |   | (5                 | )      | —               |   |
| Balance at  December 31, 2002                                    |   | —               |   | 71                 |   | 219                  |   |
| Cash payments  received from joint venture through June 30, 2003 |   | —               |   | (71                | )      | 71                   |   |
| Balance at June  30, 2003                                        |   | $                    | — |               | $      | —               |   | $ | 290 |   |

 

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**(6)CONTINGENCIES**

 

The Securities and Exchange Commission (SEC) performed an investigationof the Company and of certain former employees and officers of the Companyrelating to activities performed through 1996 while they were employees of theCompany.  The Company filed a Form 8-Kwith the SEC on February 15, 2001 disclosing the SEC investigation and itsdisposition with respect to the Company. In mid August 2001, the Company was informed by counsel for its formeremployees and officers, whom the Company knew to be the subject of the SECinvestigation, that such counsel had been informed by the SEC that the SEC wasno 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 expensesfor the year ended December 31, 2001. During the second quarter of 2002, approximately $0.3 million of thesecharges were reversed due to favorable settlements of outstanding billings withlegal firms.  The Company does notanticipate any further costs relating to this matter.

 

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.

 

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**Item2. 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 2002 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-business 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-OneÒ 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 exchange information and knowledge acrossthe Internet.  See “Item 1.  Business” in our 2002 Annual Report on Form10K.

 

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 re-sales 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 2002 Annual Report on Form 10K.

 

We incurred net losses of $0.3 million and $4.7 million in 2000 and2001, respectively, and generated net income of $1.9 million in 2002.  We incurred operating losses of $0.2 millionand $4.1 million in 2000 and 2001, respectively and generated operating incomeof $2.8 million in 2002.  Operatinglosses incurred by the Central and Eastern Europe subsidiary, which was sold in2001 totaled $0.6 million and $0.3 million for 2000 and 2001,respectively.  We reported net income of$0.2 million and $0.6 million for the three and six months ended June 30, 2003,respectively, and operating income of $0.2 million and $0.7 million,respectively, for the same periods.

 

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**RecentlyIssued Accounting Standards**

 

In July 2002, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 146, “Accounting forCosts Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)” (“EITF94-3”) and requires that a liability for costs associated with an exit ordisposal activity be recognized and measured initially at fair value in theperiod in which the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the dateof an entity’s commitment to an exit plan. Under SFAS 146 recognition for certain types of costs are delayed ascompared to the provisions of EITF 94-3. SFAS 146 is effective for new exit or disposal activities that areinitiated after December 31, 2002 and will affect the types and timing of costsincluded in future restructuring programs, if any.  Its adoption on January 1, 2003 did not have a material impact onour consolidated financial position or results of operations.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure.”  This statement amends SFAS No. 123, “Accounting for Stock-basedCompensation,” to provide alternative methods of transition for an entity thatvoluntarily changes to the fair value based method of accounting forstock-based compensation.  It alsoamends the disclosure provisions of SFAS 123 to require prominent disclosureabout the effects on reported net income of an entity’s accounting policydecisions with respect to stock-based employee compensation.  Finally, this statement amends APB OpinionNo. 28, “Interim Financial Reporting,” to require disclosure about thoseeffects in interim financial information. SFAS No. 148 is effective for financial statements for fiscal years endingafter December 15, 2002.  On April 22,2003, the FASB decided to require stock-based employee compensation to berecorded as a charge to earnings beginning in 2004.  Until that time, we have elected to continue to follow thedisclosure-only provisions of SFAS No. 123 which require disclosure of the proforma effects on net income (loss) and basic and diluted net income (loss) percommon share as if the fair value method of accounting prescribed by SFAS No.123 had been adopted, as well as certain other information (see Note 1(c) tothe Consolidated Interim Financial Statements).  We will continue to monitor the FASB’s progress on issuance ofthis standard as well as evaluate our position with respect to current guidance.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”. This Interpretation elaborates on the existing disclosure requirementsfor most guarantees, including loan guarantees such as standby letters ofcredit.  It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, of the obligations it assumesunder that guarantee and must disclose that information in its interim andannual financial statements.  Theinitial recognition and initial measurement provisions apply on a prospectivebasis to guarantees issued or modified after December 31, 2002, regardless ofthe guarantor’s fiscal year-end.  Thedisclosure requirements in the Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The adoption of this Interpretation onDecember 31, 2002 did not have a material impact on our consolidated financialposition or results of operations.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities” (FIN 46) that addresses the consolidation ofvariable interest entities.  FIN 46provides guidance for determining when a primary beneficiary should consolidatea variable interest entity, or equivalent structure, that functions to supportthe activities of the primary beneficiary. FIN 46 is effective after January 31, 2003 for newly created variableinterest entities.  For variableinterest entities created before February 1, 2003, the Interpretation iseffective as of the beginning of the first interim or annual reporting

 

17

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period beginning after June 15, 2003. We are currently evaluating what, if any, impact the adoption of thisInterpretation will have on our consolidated financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  This Statement requires that certainfinancial instruments, previously accounted for as equity, be classified asliabilities in statements of financial position.  SFAS 150 affects accounting for three types of freestandingfinancial instruments: 1) mandatorily redeemable shares, which the issuingcompany is obligated to buy back in exchange for cash or other assets, 2)instruments such as put options and forward purchase contracts, that do or mayrequire the issuer to buy back some of its shares in exchange for cash or otherassets and 3) obligations that can be settled with shares, the monetary valueof which is fixed, tied solely or predominately to a variable such as marketindex, or varies inversely with the value of the issuers’ shares.  This statement is effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  We believe thatthe adoption of this statement will not have a material impact on ourconsolidated financial position or results of operations as we do not currentlyutilize these types of financial instruments.

 

**Resultsof Operations**

 

The following table sets forth for the periods indicated, certainoperating data, and data as a percentage of total revenues:

 
|                                         |   | **Three  Months Ended  June 30, 2002** |   | **Three  Months Ended  June 30, 2003** |   |
|----------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
| **(in thousands)**                           |   | **As  Reported**                       |   | **Data as a  percent of  revenue**     |   | **As  Reported** |   | **Data as a  percent of  revenue** |   |
|                                         |   | **(Unaudited)**                        |   | **(Unaudited)**                        |   |
| Revenues:                                    |   |                                   |   |                                   |   |   |   |   |   |
| License fees                                 |   | $                                      | 740    |                                   | 7.9    | % | $ | 1,354 |   | 14.1 | % |
| Services                                     |   | 8,522                                  |   | 91.0                                   |   | 8,160 |   | 85.1 |   |
| Other-related  parties                       |   | 101                                    |   | 1.1                                    |   | 74 |   | 0.8 |   |
| Total revenues                               |   | 9,363                                  |   | 100.0                                  |   | 9,588 |   | 100.0 |   |
|                                         |   |                                   |   |                                   |   |   |   |   |   |
| Operating  expenses:                         |   |                                   |   |                                   |   |   |   |   |   |
| Cost of license  fees                        |   | 337                                    |   | 3.6                                    |   | 378 |   | 3.9 |   |
| Cost of services                             |   | 3,888                                  |   | 41.5                                   |   | 4,003 |   | 41.8 |   |
| Sales and  marketing                         |   | 1,920                                  |   | 20.5                                   |   | 2,124 |   | 22.1 |   |
| Research and  development                    |   | 1,710                                  |   | 18.3                                   |   | 1,578 |   | 16.5 |   |
| General and  administrative                  |   | 1,056                                  |   | 11.3                                   |   | 1,348 |   | 14.0 |   |
| Total operating  expenses                    |   | 8,911                                  |   | 95.2                                   |   | 9,431 |   | 98.3 |   |
| Operating income                             |   | 452                                    |   | 4.8                                    |   | 157 |   | 1.7 |   |
| Other income  (expense):                     |   |                                   |   |                                   |   |   |   |   |   |
| Equity in income  (losses) of joint ventures |   | (200                                   | )      | (2.1                                   | )      | 134 |   | 1.4 |   |
| Other expense,  net                          |   | (73                                    | )      | (0.8                                   | )      | (108 | ) | (1.2 | ) |
| Other income  (expense), net                 |   | (273                                   | )      | (2.9                                   | )      | 26 |   | 0.2 |   |
| Net income  before income taxes              |   | 179                                    |   | 1.9                                    |   | 183 |   | 1.9 |   |
| Income tax  expense                          |   | —                                 |   | —                                 |   | (28 | ) | (0.3 | ) |
| Net income                                   |   | $                                      | 179    |                                   | 1.9    | % | $ | 155 |   | 1.6 | % |

 

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|                                         |   | **Six Months  Ended  June 30, 2002** |   | **Six Months  Ended  June 30, 2003** |   |
|----------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
| **(in thousands)**                           |   | **As  Reported**                     |   | **Data as a  percent of  revenue**   |   | **As  Reported** |   | **Data as a  percent of  revenue** |   |
|                                         |   | **(Unaudited)**                      |   | **(Unaudited)**                      |   |
| Revenues:                                    |   |                                 |   |                                 |   |   |   |   |   |
| License fees                                 |   | $                                    | 1,924  |                                 | 10.4   | % | $ | 2,595 |   | 13.6 | % |
| Services                                     |   | 16,346                               |   | 88.6                                 |   | 16,249 |   | 85.4 |   |
| Other-related  parties                       |   | 189                                  |   | 1.0                                  |   | 189 |   | 1.0 |   |
| Total revenues                               |   | 18,459                               |   | 100.0                                |   | 19,033 |   | 100.0 |   |
|                                         |   |                                 |   |                                 |   |   |   |   |   |
| Operating  expenses:                         |   |                                 |   |                                 |   |   |   |   |   |
| Cost of license  fees                        |   | 702                                  |   | 3.8                                  |   | 719 |   | 3.8 |   |
| Cost of services                             |   | 7,695                                |   | 41.7                                 |   | 7,967 |   | 41.8 |   |
| Sales and  marketing                         |   | 3,436                                |   | 18.6                                 |   | 3,755 |   | 19.7 |   |
| Research and  development                    |   | 3,426                                |   | 18.6                                 |   | 3,252 |   | 17.1 |   |
| General and  administrative                  |   | 2,121                                |   | 11.5                                 |   | 2,663 |   | 14.0 |   |
| Total operating  expenses                    |   | 17,380                               |   | 94.2                                 |   | 18,356 |   | 96.4 |   |
| Operating income                             |   | 1,079                                |   | 5.8                                  |   | 677 |   | 3.6 |   |
| Other income  (expense):                     |   |                                 |   |                                 |   |   |   |   |   |
| Equity in income  (losses) of joint ventures |   | (297                                 | )      | (1.6                                 | )      | 115 |   | 0.6 |   |
| Other expense,  net                          |   | (206                                 | )      | (1.1                                 | )      | (182 | ) | (1.0 | ) |
| Other expense,  net                          |   | (503                                 | )      | (2.7                                 | )      | (67 | ) | (0.4 | ) |
| Net income  before taxes                     |   | 576                                  |   | 3.1                                  |   | 610 |   | 3.2 |   |
| Income tax  expense                          |   | —                               |   | —                               |   | (28 | ) | (0.1 | ) |
| Net income                                   |   | $                                    | 576    |                                 | 3.1    | % | $ | 582 |   | 3.1 | % |

 

**TotalRevenues**

 

Total revenues increased $0.2 million or 2.4% and $0.6 million or 3.1%for the three and six months ended June 30, 2003, respectively, as compared tothe corresponding prior year periods. The increase for the three month period is mainly the result of a $0.6million increase in license fees partially offset by a $0.4 million decrease inservice revenues.  The increase for thesix month period is mainly attributable to an increase of $1.2 million and $0.8million in license fees and service revenues, respectively, in our foreign locationsmostly offset by a $0.5 million and $0.9 million decrease in license fees andservice revenues, respectively, in the U.S. operations.  The decrease in revenue in our U.S.operations was primarily the result of continued weak economic conditions which,we believe, have resulted in customers delaying or limiting their technologyspending, choosing to purchase lower cost point solutions rather than higherdollar projects.  We believe it was alsothe result of uncertainties, especially during the first quarter, regarding thewar in Iraq and the continued threat of terrorist attacks in the U.S. andthroughout the world.  Total revenuesfor the three and six month periods ended June 30, 2003 included $3.0 millionand $6.3 million, respectively, or 30.8% and 33.3%, respectively, of totalrevenues from two customers.  For thethree months ended June 30, 2002, one customer represented $1.5 million or16.4% of total revenues.  Total revenuesfor the six months ended June 30, 2002 included $3.4 million or 25.4 % of totalrevenues from two customers.

 

We derived approximately $4.3 million and $7.8 million, or 44.7% and40.9%, of our total revenues from customers outside of the United States forthe three and six months ended June 30, 2003, respectively, compared to $2.8million and $5.3 million, or 30.6% and 29.9%, respectively, for thecorresponding prior year periods.  Weexpect that such revenues will continue to represent a significant percentageof our

 

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total revenues in the future. Most of our international license fees and service revenues aredenominated in foreign currencies. Though there are significant increases in the revenue from our foreignsubsidiaries during the first half of 2003 due to increased license andconsulting revenue the increases also result from more favorable exchange ratesduring the current period as compared to the same period in 2002.  Future fluctuations in the value of foreigncurrencies relative to the U.S. dollar in the future could result influctuations in our revenue.

 

***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 $0.6 million and $0.7 million or83.0% and 34.9% for the three and six months ended June 30, 2003, respectively,as compared to the comparable prior year periods.  The increase is mainly as a result of a large license contract fromone customer in our South African subsidiary.

 

***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 and $0.1 million or 4.2% and0.6% for the three and six months ended June 30, 2003, respectively, ascompared to the comparable prior year periods. The decrease for the three month period relates to a $0.5 million decreasein consulting revenue partially offset by an increase of $0.1 million inmaintenance revenues.  The decrease forthe six month period relates to a $0.5 million decrease in consulting revenuesmostly offset by a $0.4 million increase in maintenance revenues.  The decrease in consulting revenues resultedmainly from fewer demands for upgrades in the installed base pending therelease of a new version of our software at the end of the second quarter of2003 as well customers delaying projects until there is improvement in theeconomy.  The increase in maintenancerevenues for both periods is mainly the result of new license agreements andcustomary annual increases for existing agreements.

 

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

 
|                   |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |       |
|------------------------|--------|----------------------------------|--------|--------------------------------|------------|
|                   |   | **2002**                         |   | **2003**                       |       | **2002** |   | **2003** |   |
| **(in thousands)**     |   | **Amount**                       |   | **%****of  Total**             | ** ** | **Amount** | ** ** | **%****of  Total** | ** ** | **Amount** | ** ** | **%****of  Total** | ** ** | **Amount** | ** ** | **%****of  Total** | ** ** |
| Maintenance            |   | $                                | 3,946  |                           | 46.3       | % | $ | 4,102 |   | 50.3 | % | $ | 7,825 |   | 47.9 | % | $ | 8,194 |   | 50.4 | % |
| Consulting             |   | 4,459                            |   | 52.3                           | %          | 3,950 |   | 48.4 | % | 8,321 |   | 50.9 | % | 7,806 |   | 48.1 | % |
| Training               |   | 27                               |   | 0.3                            | %          | 28 |   | 0.3 | % | 57 |   | 0.3 | % | 54 |   | 0.3 | % |
| Custom programming     |   | 90                               |   | 1.1                            | %          | 80 |   | 1.0 | % | 143 |   | 0.9 | % | 195 |   | 1.2 | % |
| Total services revenue |   | $                                | 8,522  |                           | 100.0      | % | $ | 8,160 |   | 100.0 | % | $ | 16,346 |   | 100.0 | % | $ | 16,249 |   | 100.0 | % |

 

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***Other –Related Parties***

 

During January 2001, we entered into two South African joint ventures:AXS-One African Solutions (Pty) Ltd (“African Solutions”) and HospitalityWarehouse (Pty) Ltd (“Hospitality Warehouse”). African Solutions sells and services our suite of products.  Hospitality Warehouse uses our procurementsoftware and generates fees for purchases made by member companies primarily inthe hospitality industry.  Ownership was50% or less in both entities until November 30, 2002, at which time weacquired, for a nominal amount, the remaining 50% of the common stock ofHospitality Warehouse to make it a wholly-owned subsidiary.  We use the equity method of accounting forour investments in 20 to 50-percent-owned companies.  Under the equity method, investments are stated at cost plus orminus our equity in undistributed earnings or losses.  Revenues for the three and six months ended June 30, 2003included management fee revenue of $18 thousand and $51 thousand, respectively,and consulting revenue of $56 thousand and $138 thousand, respectively.  Revenues for the three and six months endedJune 30, 2002 from these joint ventures included management fee revenue of $97thousand and $184 thousand, respectively, and consulting revenue of $4 thousandand $5 thousand, respectively.

 

Management fees for the three and six months ended June 30, 2003decreased from the corresponding periods in 2002 as a result of our decision totemporarily stop charging management fees until the joint venture becomesprofitable.  We continue to charge director’sfees which are included in total management fees for both periods.  The increase in consulting revenue in the2003 periods resulted from the transfer of the consulting staff and relatedservices in January 2003 from African Solutions to our South Africansubsidiary.

 

**Cost ofLicense Fees**

 

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

 

Cost of license fees remained relatively flat for the three and sixmonths ended June 30, 2003, as compared to the corresponding prior yearperiods.  For the six months ended June30, 2003 an increase of $12 thousand in the amortization of capitalizedsoftware development costs and $11 thousand of third party software royaltyfees was partially offset by a decrease of $6 thousand of documentation costs.

 

**Cost ofServices**

 

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

 

Cost of services increased $0.1 million and $0.3 million or 3.0% and3.5% for the three and six months ended June 30, 2003, respectively, ascompared to the corresponding prior year periods.  The increase for the three and six month periods is primarily dueto an increase of $0.2 million and $0.3 million, respectively, in temps andconsultants expense in our South African subsidiary due to their use ofconsultants from the joint venture in 2003. The increase for the three month period is also due to a consolidatedincrease of $0.1 million in salaries and wages offset by a total decrease of$0.1 million in variable compensation and depreciation and amortizationexpense.  The increase for the six monthperiod is also due to a consolidated increase of $0.1 million in salaries andwages offset by a $0.1 million combined decrease in facilities support anddepreciation and amortization expense.

 

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As a percentage of service revenues, cost of services increased from45.6% and 47.1% for the three and six months ended June 30, 2002, respectively,to 49.1% and 49.0% for the three and six months ended June 30, 2003,respectively.  The decreased margins aredue partly to increased revenue in South Africa which currently has lowermargins than the rest of the world due to their use of high priced third partyconsultants.

 

**Salesand Marketing**

 

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

 

Sales and marketing expenses increased $0.2 million and $0.3 million or10.6% and 9.3% for the three and six months ended June 30, 2003, respectively,as compared to the corresponding prior year periods.  The increase for the three and six month periods is primarily asa result of an increase of $0.5 million and $0.6 million, respectively, insales commissions in our South Africa subsidiary mainly representing thecommission to African Solutions for a large license contract recognized thisquarter.  For the three month period,this increase was partially offset by a consolidated decrease of $0.1 millionin variable compensation and $0.2 million in marketing expenses for trade showsand seminars.  The increase for the sixmonth period ended June 30, 2003 was partially offset by a decrease of $0.2million in marketing program expenses due primarily to a decrease of $0.3million in trade show and user conference expenses partially offset by acombined increase of $0.1 million in market research and direct mail expenses.

 

**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 a straight-linebasis over periods not exceeding three years.

 

Research and development expenses decreased $0.1 million and $0.2million or 7.7% and 5.1% for the three and six months ended June 30, 2003,respectively, as compared to the comparable prior year periods.  We capitalized $0.7 million in softwaredevelopment costs in the first half of 2003 as compared to $0.4 million in thefirst half of 2002.  The rate ofcapitalization of software development costs may fluctuate depending on the mixand stage of development of our product development and engineeringprojects.  The decrease in research anddevelopment costs for the three and six months ended June 30, 2003 is primarilythe result of decreases of $0.1 million and $0.2 million, respectively, inpersonnel related expenses due to the increase in capitalized softwaredevelopment cost partially offset by customary annual salary increases andrelated benefits.

 

**Generaland Administrative**

 

General and administrative expenses consist primarily of salaries for administrative,executive and financial personnel, and outside professional fees.  General and administrative expensesincreased $0.3 million and $0.5 million or 27.7% and 25.6% for the three andsix months ended June 30, 2003,

 

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respectively, as compared to the comparable prior year periods.  The increase for the three and six monthsended June 30, 2003 is primarily as a result of increases of $0.2 million and$0.3 million, respectively, in professional fees resulting from the absence ofcredits that were received in the second quarter of 2002 (see below).  The increase for both periods is also theresult of an increase of $0.1 million in salaries and wages for each period dueto customary annual increases.  Theincrease for the six month period is also the result of an increase of $0.1million in insurance expense.

 

The Securities and Exchange Commission (SEC) performed an investigationof AXS-One and of certain of our former employees and officers relating toactivities performed through 1996 while they were our employees.  We filed a Form 8-K with the SEC on February15, 2001 disclosing the SEC investigation and its disposition with respect toAXS-One.  In mid August 2001, we wereinformed by counsel for our former employees and officers, whom we knew to bethe subject of the SEC investigation, that such counsel had been informed bythe SEC that the SEC was no longer pursuing its investigation of theirclients.  Under our certificate ofincorporation, and Delaware law, we have an indemnification obligation toreimburse legal fees to former employees and officers relating to actions takenagainst them for work performed while they were our employees.  Approximately $0.8 million in such estimatedlegal fees were recorded during the year ended December 31, 2001.  During the second quarter of 2002approximately $0.3 million of these charges were reversed due to favorablesettlements of outstanding billings with legal firms.  The Company does not anticipate any further costs relating tothis matter.

 

**Other Expense, Net**

 

Other expense, net decreased $0.3 million and $0.4 million for thethree and six months ended June 30, 2003, respectively, as compared to the sameperiods in 2002.  The decreased expenseis primarily due to increases of $0.3 million and $0.4 million, respectively,of equity in income of joint ventures related to two joint ventures enteredinto during the first quarter of 2001 by our South Africa operations.  On November 30, 2002, we acquired, for a nominalamount, the remaining 50% of the common stock of one of the entities,Hospitality Warehouse, to make it a wholly-owned subsidiary.  Equity in income of joint ventures for thethree and six months ended June 30, 2003 increased primarily due to the salescommission recognized by the joint venture related to the large licensecontract recognized during the periods. Interest expense relates to theinterest on the revolving line of credit and term loan. (See Note 2 to theConsolidated Interim Financial Statements.)

 

**IncomeTax Expense**

 

Income tax expense of $28 thousand for thethree and six months ended June 30, 2003 represents taxes due on revenue earnedin our South Africa subsidiary for the periods.

 

**SegmentInformation**

 

For the three and six months ended June 30, 2003, AXS-One EnterpriseSolutions had license fee revenues of $0.9 million and $2.0 million,respectively, compared to $0.4 million and $0.9 million, respectively, for thecomparable prior year period; service revenues of $7.5 million and $12.9million, respectively, compared to $6.8 million and $13.0 million,respectively, for the comparable prior year period; and operating income of$0.7 million and $2.3 million, respectively, compared to $0.9 million and $1.7million, respectively, for the comparable prior year period.  License fees were higher for the three andsix months ended June 30, 2003 due to a $0.7 million sale to one customer.  Service revenues decreased due to fewerdemands for upgrades in the installed base.

 

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AXSPoint Solutions had license fee revenues of $0.5 million and $0.6million, respectively, for the three and six months ended June 30, 2003,compared to $0.4 million and $0.8 million, respectively for the comparableprior year periods; services revenue of $0.2 million and $2.3 million,respectively, compared to $1.0 million and $2.2 million, respectively; for thecomparable prior year periods and operating income of $1.0 million and $1.4million, respectively, as compared to $0.8 million and $1.6 million,respectively, for the comparable prior year periods.  The increase in service revenues was mainly due to an increase inconsulting and maintenance in our United Kingdom subsidiary.

 

Tivity Solutions had no license fee revenues for the three and sixmonths ended June 30, 2003, as compared to $9 thousand and $0.3 million,respectively, for the comparable prior year periods; service revenues of $0.5million and $1.0 million, respectively, as compared to $0.6 million and $1.2 million,respectively, for the comparable prior year periods and operating income (loss)of $45 thousand and $(75) thousand, respectively, as compared to $(81) thousandand breakeven, respectively, for the comparable prior year periods.  The decrease in license fee revenues for thesix months ended June 30, 2003 from the comparable prior year period was due tolack of any sales to new or existing customers. Service revenues remainedfairly consistent for the three and six months ended June 30, 2003 as comparedto the comparable prior year period due to consulting and ongoing maintenancefor the installed base.

 

**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 in 2002) entered into during2001 by our South Africa operations.  Asdescribed below, significant management judgments and estimates must be madeand used in connection with the revenue recognized in any accountingperiod.  Material differences may resultin the amount and timing of our revenue for any period if our management madedifferent judgments or utilized different estimates.

 

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

 

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We recognize revenue in accordance with Statement of Position 97-2,“Software Revenue Recognition” (“SOP 97-2”), and Statement of Position 98-9,“Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.”  Revenue fromnon-cancelable software licenses is recognized when the license agreement hasbeen signed, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.  In multipleelement arrangements, we defer the VSOE related to the undelivered elements andrecognize revenue on the delivered elements using the residual method.  The most commonly deferred element isinitial maintenance, which is recognized on a straight-line basis over theinitial maintenance term.  The VSOE ofmaintenance is determined by using a consistent percentage of maintenance feeto license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-linebasis over the life of the applicable agreement.  Delivery of software generally occurs when the product (on CDs)is delivered to a common carrier.

 

For software license and maintenance revenue, we assess whether the feeis fixed and determinable and whether or not collection is probable.  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 performsignificant work either to alter the underlying software or to build additionalcomplex interfaces so that the software performs as the customer requests, werecognize the entire fee using contract accounting.  This would apply to our custom programming services, which aregenerally contracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period suchlosses are determined.

 

Revenues from joint ventures (included in Revenues: Other-RelatedParties in the our Consolidated Statements of Operations) includes consultingrevenue for the joint venture’s use of our South African subsidiary’sconsultants (2003 primarily) and for management fees for our subsidiaryproviding managerial, technical and other related services to the jointventures (2002 and 2003 periods) in accordance with the joint ventureagreements.  Revenue is recognized uponperformance 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 probable, we defer the fee andrecognize revenue at the time collection becomes probable, which is generallyupon 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 project are capitalized until theproduct is

 

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available for general release to customers.  The establishment of technological feasibility and the ongoingassessment of recoverability of capitalized software development costs requireconsiderable judgment by management with respect to certain external factors,including, but not limited to, anticipated future revenues, estimated economiclife and changes in technology.  It isreasonably possible that estimates of anticipated future revenues, the remainingestimated economic life of the products, or both will be reduced in the futuredue to competitive pressures.  As aresult, the carrying amount of the capitalized software costs may be reduced inthe near term.  Upon the general releaseof the software product to customers, capitalization ceases and such costs areamortized (using the straight-line method) on a product-by-product basis overthe estimated life, which is generally three years.

 

**Liquidityand Capital Resources**

 

On March 31, 1998, we entered into a Loan and Security Agreement(“Agreement”) that contained a revolving line of credit and a term loan.  Subsequent amendments to the Agreement sincethat date have made available additional term loans (See Note 2 to theConsolidated Interim Financial Statements). The available amount under the revolving line of credit at June 30, 2003was approximately $0.5 million.  Theavailable amount under the term loans at June 30, 2003 was $0.5 million.

 

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 2003will result in compliance under the Agreement, although there can be noassurances that such operating results will be achieved.

 

Our operating activities used cash of $0.3 million and $8 thousand forthe six months ended June 30, 2002 and 2003, respectively.  Net cash used by operating activities duringthe six months ended June 30, 2002 was comprised primarily of an increase inaccounts receivable and a decrease in accounts payable and accrued expensespartially offset by the net income, depreciation and amortization expense andan increase in deferred revenue.  Netcash used by operating activities during the six months ended June 30, 2003 wascomprised primarily of an increase in accounts receivable and a decrease inaccounts payable and accrued expenses partially offset by the net income,depreciation and amortization expense and an increase in deferred revenue.

 

Our investing activities used cash of $0.5 million and $0.8 million forthe six months ended June 30, 2002 and 2003, respectively.  For the six months ended June 30, 2002 usesof cash were primarily for capitalized software development costs.  The principal uses of cash for the sixmonths ended June 30, 2003 were for capitalized software development costs andthe purchase of equipment and leasehold improvements.

 

Cash provided by (used in) financing activities was $0.2 million and$(0.8) million for the six months ended June 30, 2002 and 2003,respectively.  Cash provided byfinancing activities for the six months ended June 30, 2002 related mainly toproceeds from the issuance of debt partially offset by repayments of debt.  Cash used by financing activities for thesix months ended June 30, 2003 were related to the repayment of debt.

 

We have no significant capital commitments.  Planned capital expenditures for 2003 totalapproximately $1.3 million, including any software development costs that mayqualify for capitalization under SFAS 86. Our aggregate minimum operating lease payments for 2003 will beapproximately $1.8 million.  Wegenerated net income of $1.9 million for the year ended December 31, 2002 afterexperiencing net losses of $0.3 million and $4.7 million during the years endedDecember 31, 2000 and 2001, respectively. As a result of intense competition and rapid technological changetogether with a slowing of the economy, we

 

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have experienced declining license and service revenues in each of thepast three years.  The ability togenerate net income in 2002 was in response to management’s initiatives thatbegan in 2001 intended to improve operating results and liquidity and betterposition AXS-One to compete under current market conditions.  This included, but was not limited to, ourrestructuring efforts in June of 2001 whereby we were able to reduce costssufficiently to allow us to generate net income during the last eight quartersending June 30, 2003.  Due to theseefforts we expect that our operating cash flow and available financialresources will be sufficient to fund our working capital requirements through2003.  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 for use in our U.S.operations to pay our debt and other obligations as the transfer of funds issubject to various foreign government restrictions.  Accordingly, we may in the future be required to seek additionalsources of 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.

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

In the normal course of business, we are exposed to fluctuations ininterest rates and equity market risks as we seek debt and equity capital tosustain our operations.  We are alsoexposed to fluctuations in foreign currency exchange rates as the financialresults and financial conditions of our foreign subsidiaries are translatedinto U.S. dollars in consolidation.  Wedo not use derivative instruments or hedging to manage our exposures and do notcurrently hold any market risk sensitive instruments for trading purposes.

 

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

 

See our 2002 Annual Report on Form 10K for a discussion of riskfactors.

 

**Item4. Controls and 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 Rule 13a-15(e)) as of June 30,2003 (the “Evaluation Date”), have concluded that as of the Evaluation Date,our disclosure controls and procedures were effective and designed to ensurethat material information relating to us and our consolidated subsidiarieswould be made known to them by others within those entities as appropriate toallow timely 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.

 

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**AXS-ONE INC.**

Part II

Other Information

 

**Item 1. Legal Proceedings**

 

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

 

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

 

At our Annual Meeting of Stockholders on June 11, 2003, the followingdirectors were nominated and elected by the votes indicated:

 
|              |   | **Votes For** |   | **Votes Withheld** |
|-------------------|--------|---------------|--------|--------------------|
| Elias Typaldos    |   | 19,755,271    |   | 422,679            |
| John A. Rade      |   | 19,755,271    |   | 422,679            |
| Gennaro Vendome   |   | 19,755,271    |   | 422,679            |
| Daniel H. Burch   |   | 20,147,971    |   | 29,979             |
| Robert Migliorino |   | 20,022,671    |   | 155,279            |
| William E. Vogel  |   | 20,167,971    |   | 29,979             |
| Edwin T. Brondo   |   | 20,022,671    |   | 155,279            |
| Allan Weingarten  |   | 19,901,971    |   | 275,979            |

 

In addition, the stockholders ratified the appointment of KPMG LLP asthe Company’s independent auditors for 2003 by the following vote:

 
| **Votes For** |   | **Votes Against** |   | **Abstentions** |
|---------------|--------|-------------------|--------|-----------------|
| 20,111,460    |   | 38,435            |   | 28,055          |

 

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

 

(a)          Exhibits –

 

Exhibit31      Rule 13a-14(a)/15d-14(a) Certifications

Exhibit 32      OfficerCertifications under 18 USC 1350

 

(b)         Reports on Form 8-K -

 

On April 30, 2003, theCompany filed a Report on Form 8-K reporting the issue of a press releasedisclosing material non-public information regarding the Registrant’s resultsof operations for the three months ended March 31, 2003.

 

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**AXS-ONE INC.**

 

 

SIGNATURES

 

 

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

 

 
|                                  | AXS-ONE INC. |
|---------------------------------------|--------------|
|                                  |         |
|                                  |         |
| **Date:  **August  14, 2003 | By:          | /s/ John A. Rade |   |
|                                  |         | John A. Rade |
|                                  |         | Chief Executive Officer,  President and Director |
|                                  |         |
|                                  |         |
|                                  | By:          | /s/ William G. Levering III |   |
|                                  |         | William G. Levering III |
|                                  |         | Vice President, Chief  Financial Officer,   and Treasurer

(Duly Authorized  Officer and  Principal Financial Officer) |

 

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