AXS ONE INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2003

Commission File Number 1-13591

AXS-ONE INC.

(Exact name of registrant as specified in its charter)

Delaware		13-2966911
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

301 Route 17 North
Rutherford, New Jersey		07070
(Address of principal executive offices)		(Zip Code)

(201) 935-3400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements 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 common stock as of November 3, 2003

Class		Number of Shares Outstanding
Common Stock, par value $0.01 per share		24,964,992

AXS-ONE INC.

INDEX

PART I		FINANCIAL INFORMATION

		Item 1. Financial Statements

		Consolidated Balance Sheets December 31, 2002 and September 30, 2003 (unaudited)

		Consolidated Statements of Operations (unaudited) Three and nine months ended September 30, 2002 and 2003

		Consolidated Statements of Comprehensive Income (unaudited) Three and nine months ended September 30, 2002 and 2003

		Consolidated Statements of Cash Flows (unaudited) Nine months ended September 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 2. Changes in Securities and Use of Proceeds

		Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

		Signatures

AXS-ONE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	December 31,			September 30,
	2002			2003
ASSETS
Current assets:
Cash and cash equivalents	$	2,702		$	1,344
Restricted cash	67			49
Accounts receivable, net of allowance for doubtful accounts of $379 and $176 at December 31, 2002 and September 30, 2003, respectively	3,866			4,517
Due from joint venture	345			178
Prepaid expenses and other current assets	706			668
Total current assets	7,686			6,756
Equipment and leasehold improvements, at cost:
Computer and office equipment	10,687			10,917
Furniture and fixtures	857			910
Leasehold improvements	860			870
	12,404			12,697
Less-accumulated depreciation and amortization	12,035			12,374
	369			323
Capitalized software development costs, net of accumulated amortization of $8,177 and $9,186 at December 31, 2002 and September 30, 2003, respectively	2,378			2,340
Other assets	166			196
	$	10,599		$	9,615

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	1,800		$	997
Accounts payable	2,304			1,783
Accrued expenses	2,973			2,848
Due to joint venture	179			—
Deferred revenue	8,821			8,448
Total current liabilities	16,077			14,076
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 24,964 shares issued and outstanding at December 31, 2002 and September 30, 2003, respectively	248			250
Additional paid-in capital	72,052			72,123
Accumulated deficit	(78,769		)	(77,269		)
Accumulated other comprehensive income	444			435
Total stockholders’ deficit	(6,025		)	(4,461		)
	$	10,599		$	9,615

The accompanying notes are an integral part of these consolidated financial statements.

AXS-ONE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2002			2003			2002			2003
Revenues:
License fees	$	1,030		$	2,459		$	2,954		$	5,054
Services	8,196			7,681			24,542			23,930
Other-related parties	101			71			290			260
Total revenues	9,327			10,211			27,786			29,244

Operating expenses:
Cost of license fees	393			371			1,095			1,090
Cost of services	3,838			3,815			11,533			11,782
Sales and marketing	1,379			1,780			4,815			5,535
Research and development	1,697			1,697			5,123			4,949
General and administrative	1,259			1,483			3,380			4,146
Total operating expenses	8,566			9,146			25,946			27,502
Operating income	761			1,065			1,840			1,742
Other income (expense):
Interest income	8			17			31			49
Interest expense	(100		)	(48		)	(275		)	(167		)
Gain on sale of subsidiary	149			—			219			71
Equity in income (losses) of joint ventures	(179		)	(81		)	(476		)	34
Other expense, net	(52		)	(6		)	(176		)	(172		)
Other expense, net	(174		)	(118		)	(677		)	(185		)
Net income before income taxes	$	587		$	947		$	1,163		$	1,557
Income tax expense	—			(29		)	—			(57		)
Net income	$	587		$	918		$	1,163		$	1,500

Basic net income per common share	$	0.02		$	0.04		$	0.05		$	0.06
Weighted average basic common shares outstanding	24,827			24,960			24,808			24,929

Diluted net income per common share	$	0.02		$	0.04		$	0.05		$	0.06
Weighted average diluted common shares outstanding	25,170			26,228			25,566			25,932

The accompanying notes are an integral part of these consolidated financial statements.

AXS-ONE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2002			2003			2002		2003
Net income	$	587		$	918		$	1,163	$	1,500
Foreign currency translation adjustment	(13		)	(29		)	74		(9		)
Comprehensive income	$	574		$	889		$	1,237	$	1,491

The accompanying notes are an integral part of these consolidated financial statements.

AXS-ONE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2002			2003
Cash flows from operating activities:
Net income	$	1,163		$	1,500
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Increase in cash surrender value of officers’ life insurance	(41		)	(14		)
Depreciation and amortization	1,473			1,214
Net recovery of doubtful accounts	(63		)	(132		)
Gain on sale of subsidiary	(219		)	(71		)
Equity in (income) losses of joint ventures	476			(34		)
Consulting services received in lieu of payment on note receivable	136			—
Consulting services received in lieu of payment on accounts receivable	—			45
Changes in current assets and liabilities
Restricted cash	(32		)	27
Accounts receivable	(182		)	(293		)
Due from joint venture	(292		)	167
Prepaid expenses and other current assets	(280		)	76
Accounts payable and accrued expenses	(1,400		)	(862		)
Deferred revenue	(1,191		)	(570		)
Net cash flows provided by (used in) operating activities	(452		)	1,053

Cash flows from investing activities:
Change in other assets	(9		)	11
Proceeds from sale of subsidiary	67			—
Loans to joint ventures	(125		)	(156		)
Capitalized software development costs	(526		)	(971		)
Purchase of equipment and leasehold improvements	(169		)	(154		)
Net cash flows used in investing activities	(762		)	(1,270		)

Cash flows from financing activities:
Proceeds from exercise of stock options	20			71
Net borrowings from revolving line of credit	1,482			—
Proceeds from issuance of long-term debt	500			—
Payments of long term debt and capital lease obligations	(1,350		)	(1,350		)
Net cash flows provided by (used in) financing activities	652			(1,279		)
Foreign currency exchange rate effects on cash and cash equivalents	159			138
Net decrease in cash and cash equivalents	(403		)	(1,358		)
Cash and cash equivalents, beginning of period	1,048			2,702
Cash and cash equivalents, end of period	$	645		$	1,344

Supplemental disclosures of cash flow information:
Cash paid during the period for —
Interest	$	274		$	180
Income taxes	$	15		$	108
Non-cash investing activities —
Consulting services received in lieu of payment on note receivable	$	136		$	—

The accompanying notes are an integral part of these consolidated financial statements.

AXS-ONE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In thousands, except per share data)

(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 and storage software solutions for global 2000 businesses, and scheduling and time and expenses solutions for professional services organizations. The Company also offers consulting, installation, training and maintenance services in support of its customers’ use of its software products.

(a) Basis of Presentation

The accompanying consolidated financial statements include the accounts of 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 transactions and balances have been eliminated. During the first quarter of 2001, the Company’s South Africa operations entered into two joint ventures. Ownership was 50% or less in both entities until November 30, 2002, at which time the Company acquired, for a nominal amount, the remaining 50% of the common stock of one of the entities, Hospitality Warehouse, to make it a wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated. The Company uses the equity method of accounting for its joint venture that it owns between 20 and 50%. Under the equity method, investments are stated at cost plus or minus the Company’s equity in undistributed earnings or losses.

The unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of these consolidated financial statements.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

(b) Revenue Recognition

The Company recognizes 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 to Certain Transactions.” Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. In multiple element arrangements, the Company defers the vendor-specific objective evidence of fair value (“VSOE”) related to the undelivered elements and recognizes revenue on the delivered elements using the residual method. The most commonly deferred element is initial maintenance, which is recognized on a straight-line basis over the initial maintenance

term. The VSOE of maintenance is determined by using a consistent percentage of maintenance fee to license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis 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, the Company assesses whether the fee is fixed and determinable and whether or not collection is probable. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the Company’s normal payment terms, which range from 30 to 90 days from invoice date, it accounts for the fee as not being fixed and determinable. In these cases, the Company recognizes revenue as the fees become due.

The majority of the Company’s training and consulting services are billed based on hourly rates. The Company generally recognizes revenue as these services are performed. However, when the Company enters into an arrangement that requires it to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests, the Company recognizes the entire fee using contract accounting. This would apply to the Company’s custom programming services which are generally contracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period such losses are determined.

Revenues from joint ventures (included in Revenues: Other-Related Parties in the Company’s Consolidated Statements of Operations) includes consulting revenue for the joint venture’s use of the Company’s South African subsidiary’s consultants (2003 only) and for management and director’s fees arising from the Company’s South African subsidiary providing managerial, technical and other related services to the joint ventures (2002 and 2003 periods) in accordance with the joint venture agreements. Revenue is recognized upon performance of the services.

The Company assesses assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from its customers. If the Company determines that collection of a fee is not probable, it defers the fee and recognizes revenue at the time collection becomes probable, which is generally upon receipt of cash.

The Company adopted EITF Issue No. 01-14, “Income Statement Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses Incurred” on January 1, 2002. Accordingly, reimbursements received for out-of-pocket expenses incurred are classified as revenue in the unaudited consolidated statements of operations.

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

for stock-based compensation. However, it allows an entity to continue to measure compensation cost for those instruments using the intrinsic-value method of accounting prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” provided it discloses the effect of applying the fair market value of SFAS 123, as amended by SFAS 148, in footnotes to the financial statements. On April 22, 2003, the FASB decided to require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. Until that time, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no stock option related compensation expense has been recognized in the consolidated statements of operations, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. The Company was required to adopt SFAS 148 for the year ended December 31, 2002. The adoption of SFAS 148 did not have an impact on the 2002 consolidated results of operations or financial position of the Company and is not expected to have an impact on the consolidated results of operations or financial position of the Company through 2003 as the Company expects to continue to apply the intrinsic value method prescribed by APB 25 until such time as the new standard is issued by the FASB.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2003		2002			2003
Net income as reported	$	587	$	918	$	1,163		$	1,500
Deduct: Total stock based employee compensation determined under fair value based method for all awards	373		326		1,250			1,047
Pro forma net income (loss)	$	214	$	592	$	(87	)	$	453

Net income (loss) per common share:
Basic - as reported	$	0.02	$	0.04	$	0.05		$	0.06
Basic - pro forma	0.01		0.02		—			0.02

Diluted- as reported	$	0.02	$	0.04	$	0.05		$	0.06
Diluted - pro forma	0.01		0.02		—			0.02

The Company has used the Black-Scholes option-pricing model in calculating the fair value of options granted. The assumptions used and the weighted average information for the three and nine months ended September 30, 2002 and 2003 are as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2002			2003			2002			2003
Risk-free interest rate	4.78		%	4.88		%	4.78		%	4.64		%
Expected dividend yield	—			—			—			—
Expected lives	6.17 years			7 years			6.52 years			7 years
Expected volatility	133		%	45		%	133		%	56		%
Weighted-average grant date fair value of options granted during the period	$	0.46		$	0.95		$	0.64		$	0.81
Weighted-average remaining contractual life of options outstanding	7.0 years			6.5 years			7.0 years			6.5 years
Weighted-average exercise price of 3,676 and 3,913 options exercisable at September 30, 2002 and 2003, respectively	$	1.60		$	1.72		$	1.60		$	1.72

2) REVOLVING LINE OF CREDIT AND LONG-TERM DEBT

On March 31, 1998, the Company entered into a Loan and Security Agreement (“Agreement”) that contained a revolving line of credit and a term loan (the “Initial Term Loan”).

Borrowings under the revolving line of credit bear annual interest at prime rate plus 1.25% subject to a minimum interest rate of 8.0% per annum. The Agreement provides for yearly fees as follows: (i) $111 in year one, $86 in years two and three, $77 in year four, $74 in years five and six and (ii) an unused revolving line of credit fee of .375% per annum. The Agreement is secured by substantially all domestic assets of the Company together with a pledge of 65% of the stock of its foreign subsidiaries, and contains certain restrictive financial covenants. Under the revolving line of credit the Company currently has available the lesser of $5 million or 85% of eligible receivables, as defined. The net available amount under the revolving line of credit at September 30, 2003 was approximately $1.0 million of which no amounts were outstanding.

The Initial Term Loan provided for $5 million available in one draw-down which the Company borrowed on the closing date in 1998. Effective December 22, 1999, the Company amended the Agreement (Amendment No. 7) in order to make available to the Company 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 second term loan, collectively the “A Term Loan,” bore interest at the prime rate as defined (4.00%

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

Amendment No. 7 also made available a third term loan (the “B Term Loan”) in the original principal amount of $750, which the Company borrowed in full. The B Term Loan bears interest at the 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, of which the Company has borrowed $4.0 million, extended the termination date of the credit facility to March 31, 2004 and established restrictive financial covenants (which are quarterly for 2003) based on cumulative EBITDA (earnings before interest, taxes and depreciation and amortization). The Company was in compliance with these covenants through September 30, 2003. The amount available under the ‘B’ term loans at September 30, 2003 was $500. (For further information see Note 3 to the Company’s 2002 Annual Report on Form 10-K.)

The aggregate outstanding principal amount of the Term Loans is repayable in monthly installments of $150 beginning September 2002 over the remaining term of the Agreement. Any unpaid principal and interest is due in full on March 31, 2004. The outstanding principal amount at September 30, 2003 was $997.

Amendment No. 12 provides a limitation that if the total outstanding balance of the Term Loans exceeds at any time the lesser of (i) 40% of eligible maintenance revenues from August 8, 2002 through December 31, 2002, 25% of eligible maintenance revenues from January 1, 2003 through March 31, 2004 and (ii) $4.5 million, then the Company is required to prepay the principal amount in an amount sufficient to cause the aggregate principal amount of the Term Loans to be less than or equal to the relevant limits set forth above. As of September 30, 2003, eligible maintenance revenues 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 in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is based on the weighted average number of shares outstanding including the dilutive effect of stock options and warrants. Diluted net income per common share for the three and nine months ended September 30, 2002 does not include the effects of outstanding options to purchase 4,342 and 3,538, respectively, shares of common stock and outstanding warrants to purchase 476 shares of common stock for each period as the effect of their inclusion is anti-dilutive for the periods. Diluted net income per common share for the three and nine months ended September 30, 2003 does not include the effects of outstanding options to purchase 3,064 and 3,267 shares, respectively, of common stock and outstanding warrants to purchase, for both periods, 100 shares of common stock as the effect of their inclusion is anti-dilutive for the periods.

The following represents the calculations of the basic and diluted net income per common share for the three and nine months ended September 30, 2002 and 2003.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2002		2003		2002		2003
Net income	$	587	$	918	$	1,163	$	1,500

Weighted average basic common shares outstanding during the periods	24,827		24,960		24,808		24,929

Dilutive effect of stock options and warrants	343		1,268		758		1,003
Weighted average diluted common shares outstanding during the periods	25,170		26,228		25,566		25,932

Basic net income per common share	$	0.02	$	0.04	$	0.05	$	0.06

Diluted net income per common share	$	0.02	$	0.04	$	0.05	$	0.06

(4) OPERATING SEGMENTS

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

a) AXS-One® Enterprise Solutions provide Enterprise Solutions to global 2000 companies that enable organizations to achieve process transparency throughout their value chain. These include AXS-One’s Foundation products for which the Company has an extensive installed base of customers.

b) AXSPoint® Solutions focus on identifying markets that need to rapidly leverage the Internet in communicating, exchanging or reconciling large volumes of knowledge with their customers, suppliers and partners. AXSPoint Solutions target large information-centric organizations that can utilize self-service information systems to improve communications with their customers and improve access to business intelligence. Also included is an email compliance solution designed to help the Company’s customers meet SEC and National Association of Securities Dealers (NASD) regulations.

c) Tivity™ Solutions, a verticalized version of AXS-One Enterprise solutions, provide a full suite of business solutions and services to organizations that primarily sell professionals’ time.

The Company evaluates the performance of its product lines based on revenues and operating income. Summarized financial information concerning the Company’s product lines is shown in the following table. The Chief Executive Officer uses the information below in this format while making decisions about allocating resources to each product line and assessing its performance.

	AXS-One
	Enterprise		AXSPoint		Tivity
	Solutions		Solutions		Solutions		Total
Three Months Ended September 30, 2002
Revenues:
License fees	$	180	$	827	$	23	$	1,030
Services	6,445		1,028		723		8,196
Total Revenues, excluding related party revenue	6,625		1,855		746		9,226
Operating income	741		1,202		171		2,114
Total assets	7,844		1,208		722		9,774
Capital expenditures	103		10		10		123
Depreciation and amortization	436		9		9		454

Three Months Ended September 30, 2003
Revenues:
License fees	$	2,079	$	380	$	—	$	2,459
Services	6,038		1,137		506		7,681
Total Revenues, excluding related party revenue.	8,117		1,517		506		10,140
Operating income	1,911		561		258		2,730
Total assets	9,023		465		127		9,615
Capital expenditures	43		4		4		51
Depreciation and amortization	383		5		6		394

Nine Months Ended September 30, 2002
Revenues:
License fees	$	1,077	$	1,591	$	286	$	2,954
Services	19,406		3,178		1,958		24,542
Total Revenues, excluding related party revenue	20,483		4,769		2,244		27,496
Operating income	2,425		2,800		173		5,398
Total assets	7,844		1,208		722		9,774
Capital expenditures	141		14		14		169
Depreciation and amortization	1,393		39		41		1,473

Nine Months Ended September 30, 2003
Revenues:
License fees	$	4,053	$	1,001	$	—	$	5,054
Services	18,958		3,430		1,542		23,930
Total Revenues, excluding related party revenue	23,011		4,431		1,542		28,984
Operating income	4,230		1,948		183		6,361
Total assets	9,023		465		127		9,615
Capital expenditures	129		12		13		154
Depreciation and amortization	1,177		17		20		1,214

Reconciliation of total segment operating income to consolidated operating income:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2002			2003			2002			2003
Operating income from reportable segments	$	2,114		$	2,730		$	5,398		$	6,361
Unallocated revenue, other —related parties	101			71			290			260
Unallocated general and administrative expense	(1,242		)	(1,471		)	(3,326		)	(4,113		)
Other corporate unallocated expenses	(212		)	(265		)	(522		)	(766		)
Total consolidated operating income	$	761		$	1,065		$	1,840		$	1,742

(5) DIVESTITURE

On September 20, 2001, the Company sold its wholly-owned subsidiary located in Central and Eastern Europe (C.E.E.), including offices in Poland, Estonia and Bulgaria, to Porterfield International Ltd. (“Buyer”), a company wholly-owned by the former managing director of C.E.E. and his wife. The Company received consideration in the form of a promissory note of Buyer in the face amount 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 of approximately $253, which the Company recorded in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 81 (SAB 81), “Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity.” Additional direct costs 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 note receivable was paid or equivalent value for services was received, but only after $180 was received. Through December 31, 2002, $430 had been received in either payment to the Company or equivalent services provided by the Buyer to the Company or to the Company’s joint venture. The Company recognized $219 of such gain through December 31, 2002, which included a reversal of $45 related to the original $180 in accrued expenses recorded at the time of the sale. The $45 was recognized during the three months ended September 30, 2002 as a result of the release of a past customer claim. The remaining gain of $71, reflected as Deferred revenue on the accompanying December 31, 2002 consolidated balance sheet, was recognized in February 2003 when the Company received payment from the Company’s joint venture for services provided by the Buyer to the joint venture. The following table shows the activity related to the promissory note and related deferred gain and gain recognized:

	Note			Deferred			Gain
	Receivable			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 September 30, 2003	—			(71		)	71
Balance at September 30, 2003	$	—		$	—		$	290

(6) CONTINGENCIES

The Securities and Exchange Commission (SEC) performed an investigation of the Company and of certain former employees and officers of the Company relating to activities performed through 1996 while they were employees of the Company. The Company filed a Form 8-K with the SEC on February 15, 2001 disclosing the SEC investigation and its disposition with respect to the Company. In mid August 2001, the Company was informed by counsel for its former employees and officers, whom the Company knew to be the subject of the SEC investigation, that such counsel had been informed by the SEC that the SEC was no longer pursuing its investigation of their clients. Under the Company’s certificate of incorporation, and Delaware law, the Company has an indemnification obligation to reimburse legal fees to former employees and officers relating to actions taken against them for work performed while they were employed by the Company. Approximately $0.8 million in such estimated legal fees were recorded in general and administrative expenses for the year ended December 31, 2001. During the second quarter of 2002, approximately $0.3 million of these charges were reversed due to favorable settlements of outstanding billings with legal firms. The Company does not anticipate any further costs relating to this matter.

Historically, the Company has been involved in other disputes and/or litigation encountered in its normal course of business. The Company believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s business, consolidated financial condition, results of operations or cash flows.

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

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

This Report contains statements of a forward-looking nature within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events or the future financial performance of AXS-One. Investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, investors should specifically consider the various factors identified in this Report which could cause actual results to differ materially from those indicated by such forward-looking statements, including the matters set forth in “Business—Risk Factors” in our 2002 Annual Report on Form 10K.

Overview

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

We supply a suite of e-business solutions based upon our next generation n-tier Internet-architecture. This family of products, e-Celleratorä products, is designed to meet the needs of organizations that wish to conduct business across the Internet. e-Cellerator products are used to build two families of solutions, AXS-OneÒ Enterprise solutions and AXSPointÒ solutions. AXS-One Enterprise solutions are designed to enable businesses to conduct business transactions across the Internet. AXSPoint solutions are designed to enable organizations to exchange information and knowledge across the Internet. This includes our new email compliance software designed to help our customers meet SEC and NASD regulations. See “Item 1. Business” in our 2002 Annual Report on Form 10K.

We have experienced, and may in the future experience, significant fluctuations in our quarterly and annual revenues, results of operations and cash flows. We believe that domestic and international operating results and cash flows will continue to fluctuate significantly in the future as a result of a variety of factors, including the timing of revenue recognition related to significant license agreements, the lengthy sales cycle for our products, the proportion of revenues attributable to license fees versus services, the utilization of third parties to perform services, the amount of revenue generated by re-sales of third party software, changes in product mix, demand for our products, the size and timing of individual license transactions, the introduction of new products and product enhancements by us or our competitors, changes in customers’ budgets, competitive conditions in the industry and general economic conditions. For a description of certain factors that may 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 and 2001, respectively, and generated net income of $1.9 million in 2002. We incurred operating losses of $0.2 million and $4.1 million in 2000 and 2001, respectively, and generated operating income of $2.8 million in 2002. Operating losses incurred by the Central and Eastern Europe subsidiary, which was sold in 2001 totaled $0.6 million and $0.3 million for 2000 and 2001, respectively. We reported net income of $0.9 million and $1.5 million for the three and nine months ended September 30, 2003, respectively, and operating income of $1.1 million and $1.7 million, respectively, for the same periods.

Recently Issued Accounting Standards

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

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. On April 22, 2003, the FASB decided to require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. Until that time, we have elected to continue to follow the disclosure-only provisions of SFAS No. 123 which require disclosure of the pro forma effects on net income (loss) and basic and diluted net income (loss) per common 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) to the Consolidated Interim Financial Statements). We will continue to monitor the FASB’s progress on issuance of this standard as well as evaluate our position with respect to current guidance.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements in the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this Interpretation on December 31, 2002 did not have a material impact on our consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) that addresses the consolidation of variable interest entities. FIN 46 provides guidance for determining when a primary beneficiary should consolidate a variable interest entity, or equivalent structure, that functions to support the activities of the primary beneficiary. FIN 46 is effective after January 31, 2003 for newly created variable interest entities. For variable interest entities created before February 1, 2003, the implementation date has been postponed to effect financial statements issued for

the first interim or annual period ending after December 15, 2003 provided the reporting entity has not already issued financial statements in accordance with FIN 46. We are currently evaluating what, if any, impact the adoption of this Interpretation will have on our consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement requires that certain financial instruments, previously accounted for as equity, be classified as liabilities in statements of financial position. SFAS 150 affects accounting for three types of freestanding financial instruments: 1) mandatorily redeemable shares, which the issuing company 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 may require the issuer to buy back some of its shares in exchange for cash or other assets and 3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominately to a variable such as market index, or varies inversely with the value of the issuers’ shares. This statement is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on our consolidated financial position or results of operations as we do not currently utilize these types of financial instruments.

Results of Operations

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

	Three Months Ended					Three Months Ended
	September 30, 2002					September 30, 2003
				Data as a					Data as a
	As			percent of		As			percent of
(in thousands)	Reported			revenue		Reported			revenue
	(Unaudited)					(Unaudited)
Revenues:
License fees	$	1,030		11.0	%	$	2,459		24.1	%
Services	8,196			87.9		7,681			75.2
Other-related parties	101			1.1		71			0.7
Total revenues	9,327			100.0		10,211			100.0

Operating expenses:
Cost of license fees	393			4.2		371			3.7
Cost of services	3,838			41.1		3,815			37.4
Sales and marketing	1,379			14.8		1,780			17.4
Research and development	1,697			18.2		1,697			16.6
General and administrative	1,259			13.5		1,483			14.5
Total operating expenses	8,566			91.8		9,146			89.6
Operating income	761			8.2		1,065			10.4
Other income (expense):
Equity in income (losses) of joint ventures	(179		)	(1.9	)	(81		)	(0.8	)
Other income (expense), net	5			—		(37		)	(0.3	)
Other expense, net	(174		)	(1.9	)	(118		)	(1.1	)
Net income before income taxes	587			6.3		947			9.3
Income tax expense	—			—		(29		)	(0.3	)
Net income	$	587		6.3	%	$	918		9.0	%

	Nine Months Ended					Nine Months Ended
	September 30, 2002					September 30, 2003
				Data as a					Data as a
	As			percent of		As			percent of
(in thousands)	Reported			revenue		Reported			revenue
	(Unaudited)					(Unaudited)
Revenues:
License fees	$	2,954		10.6	%	$	5,054		17.3	%
Services	24,542			88.3		23,930			81.8
Other-related parties	290			1.1		260			0.9
Total revenues	27,786			100.0		29,244			100.0

Operating expenses:
Cost of license fees	1,095			4.0		1,090			3.7
Cost of services	11,533			41.5		11,782			40.3
Sales and marketing	4,815			17.3		5,535			18.9
Research and development	5,123			18.4		4,949			16.9
General and administrative	3,380			12.2		4,146			14.2
Total operating expenses	25,946			93.4		27,502			94.0
Operating income	1,840			6.6		1,742			6.0
Other income (expense):
Equity in income (losses) of joint ventures	(476		)	(1.7	)	34			0.1
Other expense, net	(201		)	(0.7	)	(219		)	(0.8	)
Other expense, net	(677		)	(2.4	)	(185		)	(0.7	)
Net income before taxes	1,163			4.2		1,557			5.3
Income tax expense	—			—		(57		)	(0.2	)
Net income	$	1,163		4.2	%	$	1,500		5.1	%

Total Revenues

Total revenues increased $0.9 million or 9.5% and $1.5 million or 5.2% for the three and nine months ended September 30, 2003, respectively, as compared to the corresponding prior year periods. The increase for the three month period is mainly the result of a $1.4 million increase in license fees which included a $1.1 million license fee from one customer in the U.S. operations, partially offset by a $0.5 million decrease in U.S. service revenues. The increase for the nine month period is mainly attributable to an increase of $2.1 million in license fees which included a $1.1 million license fee from one customer in our U.S. operations and a $0.7 million license fee from one customer in our South Africa operations. This increase was partially offset by a $1.4 million decrease in service revenues from U.S. operations that was, in turn, partially offset by an increase of $0.8 million in service revenues from our foreign operations. The decrease in service revenues 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 technology spending, choosing to purchase lower cost point solutions rather than higher dollar projects. We believe it was also the result of uncertainties, especially during the first quarter, regarding the war in Iraq and the continued threat of terrorist attacks in the U.S. and throughout the world.

Total revenues for the three months ended September 30, 2003 included $2.5 million or 24.1% of total revenues from one customer. Total revenues for the nine months ended September 30, 2003 included $3.9 million or 13.2% and $5.9 million or 20.2% of total revenues from two customers, respectively. For the three months ended September 30, 2002, two customers represented $3.4 million or 12.3% and $4.3 million or 17.5%, respectively, of total revenues. Total revenues for the nine months ended September

30, 2002 included $3.4 million or 12.3% and $4.3 million or 17.5% of total revenues from two customers, respectively.

We derived approximately $3.1 million and $10.9 million, or 30.1% and 37.1%, of our total revenues from customers outside of the United States for the three and nine months ended September 30, 2003, respectively, compared to $2.9 million and $8.2 million, or 30.9% and 29.5%, respectively, for the corresponding prior year periods. We expect that such revenues will continue to represent a significant percentage of our total revenues in the future. Most of our international license fees and service revenues are denominated in foreign currencies. Though there are significant increases in the revenue from our foreign subsidiaries during the nine months ended September 30, 2003 due to increased license and consulting revenue the increases are also the result of more favorable exchange rates during the current period as compared to the same period in 2002. Future fluctuations in the value of foreign currencies relative to the U.S. dollar in the future could result in fluctuations in our revenue.

License Fees

License fees include revenues from software license agreements we entered into with our customers with respect to both our products and, to a lesser degree, third party products resold by us. Total license fees increased $1.4 million or 138.7% and $2.1 million or 71.1% for the three and nine months ended September 30, 2003, respectively, as compared to the corresponding prior year periods. The increase for the nine-month period is mainly the result of licenses of new products to existing and new customers in the U.S. including licenses, in the third quarter, of our recently released email compliance software designed to help our customers meet SEC and NASD regulations. The increase for the nine month period is also the result of a large license contract from one customer in our South African subsidiary.

Service Revenues

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

Service revenues decreased $0.5 million or 6.3% and $0.6 million or 2.5% for the three and nine months ended September 30, 2003, respectively, as compared to the corresponding prior year periods. The decrease for the nine month period is primarily the result of a $1.0 million decrease in consulting revenue, mostly in our U.S. and U.K. operations, resulting mainly from fewer demands for upgrade services in the installed base in the early part of the year pending the release of a new version of our software at the end of the second quarter of 2003 as well as customers delaying projects until there is improvement in the economy. Most customers tend to upgrade their systems within a twelve-month period following the release of a new version of the software. The decrease is partially offset by a $0.4 million increase in total maintenance revenues for the nine months ended September 30, 2003. The increase in maintenance revenues is mainly the result of new license agreements and customary annual increases for existing agreements.

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

	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands)	2002					2003				2002				2003
				% of				% of				% of				% of
	Amount			Total		Amount		Total		Amount		Total		Amount		Total
Maintenance	$		4,089	49.9	%	$	4,087	53.2	%	$	11,915	48.6	%	$	12,281	51.3	%
Consulting	3,945			48.1	%	3,488		45.4	%	12,266		50.0	%	11,295		47.2	%
Training	49			0.6	%	32		0.4	%	105		0.4	%	85		0.4	%
Custom programming	113			1.4	%	74		1.0	%	256		1.0	%	269		1.1	%
Total services revenue	$	8,196		100.0	%	$	7,681	100.0	%	$	24,542	100.0	%	$	23,930	100.0	%

Other —Related Parties

During January 2001, we entered into two South African joint ventures: AXS-One African Solutions (Pty) Ltd (“African Solutions”) and Hospitality Warehouse (Pty) Ltd (“Hospitality Warehouse”). African Solutions sells and services our suite of products. Hospitality Warehouse uses our procurement software and generates fees for purchases made by member companies primarily in the hospitality industry. Ownership was 50% or less in both entities until November 30, 2002, at which time we acquired, for a nominal amount, the remaining 50% of the common stock of Hospitality Warehouse to make it a wholly-owned subsidiary. We use the equity method of accounting for our investments in 20 to 50 percent-owned companies. Under the equity method, investments are stated at cost plus or minus our equity in undistributed earnings or losses. Revenues for the three and nine months ended September 30, 2003 included management fee revenue of $8 thousand and $59 thousand, respectively, and consulting revenue of $63 thousand and $201 thousand, respectively, solely from African Solutions. Revenues for the three and nine months ended September 30, 2002 from both joint ventures included management fee revenue of $95 thousand and $279 thousand, respectively and consulting revenue of $6 thousand and $11 thousand, respectively.

Management fees for the three and nine months ended September 30, 2003 decreased from the corresponding periods in 2002 as a result of our decision to temporarily stop charging management fees until African Solutions becomes profitable. We continue to charge directors’ fees, which are included in total management fees for both periods. The increase in consulting revenue in the 2003 periods resulted from services of the internal consulting staff hired in January 2003 to complement the services of third party consultants from African Solutions and elsewhere.

Cost of License Fees

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

Cost of license fees decreased slightly for the three and nine months ended September 30, 2003 as compared to the corresponding prior year periods. The amortization of software development costs and costs of third party royalties for 2003 are consistent with the prior year costs for both periods presented.

Cost of Services

Cost of services consists primarily of personnel and third party costs for product quality assurances, training, installation, consulting and customer support.

Cost of services is approximately the same for the three months ended September 30, 2002 and 2003. An increase of $0.2 million in temps and consultants in the 2003 period was offset by decreases of $0.1 million in travel and living expenses and $0.1 million in variable compensation. Cost of services increased $0.2 million or 2.2% for the nine months ended September 30, 2003 as compared to the corresponding prior year period. The increase for the nine month period is primarily due to an increase of $0.5 million in temps and consultants expense mainly in our South African subsidiary due to their continued use of consultants from the joint venture in 2003. The increase for the nine-month period is also due to a consolidated increase of $0.1 million in salaries and wages offset by a decrease of $0.2 million in travel and living expenses and a $0.1 million combined decrease in facilities support and depreciation and amortization expense.

As a percentage of service revenues, cost of services increased from 46.8% and 47.0% for the three and nine months ended September 30, 2002, respectively, to 49.7% and 49.2% for the three and nine months ended September 30, 2003, respectively. The decreased margins are due partly to increased revenue in South Africa, which currently has lower margins than the rest of the world due to their use of high priced third party consultants.

Sales and Marketing

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

Sales and marketing expenses increased $0.4 million and $0.7 million or 29.1% and 15.0% for the three and nine months ended September 30, 2003, respectively, as compared to the corresponding prior year periods. The increase for the nine month period is primarily as a result of an increase of $0.6 million in sales commissions in our South Africa subsidiary mainly representing the commission to African Solutions for a large license contract recognized in the second quarter. It is also due to a $0.2 million increase in salaries and wages and a $0.2 million increase in other expense partially offset by a $0.2 million decrease in marketing expenses due primarily to a decrease in trade show and user conference expenses. For the three month period, the increase is primarily due to a $0.2 million increase in people related expenses and a $0.2 million increase in Hospitality Warehouse sales expense which was recorded in the prior year in equity in losses of joint venture.

Research and Development

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

Research and development expenses remained the same for the three months ended September 30, 2003 and decreased $0.2 million or 3.4% for the nine months ended September 30, 2003 as compared to the comparable prior year periods. We capitalized $1.0 million in software development costs for the nine months ended September 30, 2003 as compared to $0.5 million in the corresponding prior year period. The rate of capitalization of software development costs may fluctuate depending on the mix and stage of development of our product development and engineering projects. The decrease in research and development costs for the nine months ended September 30, 2003 is primarily the result of a decrease of $0.2 million in personnel related expenses due to the increase in capitalized software development costs partially offset by customary annual salary increases and related benefits.

General and Administrative

General and administrative expenses consist primarily of salaries for administrative, executive and financial personnel, and outside professional fees. General and administrative expenses increased $0.2 million and $0.8 million or 17.8% and 22.7% for the three and nine months ended September 30, 2003, respectively, as compared to the comparable prior year periods. The increase for the nine months ended September 30, 2003 is primarily as a result of an increase of $0.3 million in professional fees resulting from the absence of credits that were received in the second quarter of 2002 (see below). The increase for the nine-month period is also the result of an increase of $0.1 million in insurance expense, $0.2 million in rent expense and $0.2 million in salaries and wages due to customary annual increases. The increase for the three month period is primarily the result of increases in variable compensation, rent expense and professional fees.

The Securities and Exchange Commission (SEC) performed an investigation of AXS-One and of certain of our former employees and officers relating to activities performed through 1996 while they were our employees. We filed a Form 8-K with the SEC on February 15, 2001 disclosing the SEC investigation and its disposition with respect to AXS-One. In mid August 2001, we were informed by counsel for our former employees and officers, whom we knew to be the subject of the SEC investigation, that such counsel had been informed by the SEC that the SEC was no longer pursuing its investigation of their clients. Under our certificate of incorporation, and Delaware law, we have an indemnification obligation to reimburse legal fees to former employees and officers relating to actions taken against them for work performed while they were our employees. Approximately $0.8 million in such estimated legal fees were recorded during the year ended December 31, 2001. During the second quarter of 2002 approximately $0.3 million of these charges were reversed due to favorable settlements of outstanding billings with legal firms. The Company does not anticipate any further costs relating to this matter.

Other Expense, Net

Other expense, net decreased $56 thousand and $0.5 million for the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002. The decreased expense is primarily due to increases of $0.1 million and $0.5 million, respectively, of equity in income (losses) of joint ventures related to two joint ventures entered into during the first quarter of 2001 by our South Africa operations. On November 30, 2002, we acquired, for a nominal amount, 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 the nine months ended September 30, 2003 increased primarily due to the sales commission recognized by the joint venture related to the large license contract recognized during the second quarter. Interest expense relates to the interest on the revolving line of credit and term loan. (See Note 2 to the Consolidated Interim Financial Statements.)

Income Tax Expense

Income tax expense of $29 thousand and $57 thousand for the three and nine months ended September 30, 2003, respectively, represents taxes due on income earned in our South Africa subsidiary for the periods. There is no provision for income tax expense in the U. S. or our other foreign subsidiaries due to the availability of net operating loss carry forwards.

Segment Information

For the three and nine months ended September 30, 2003, AXS-One Enterprise Solutions had license fee revenues of $2.1 million and $4.1 million, respectively, compared to $0.2 million and $1.1 million, respectively, for the comparable prior year period; service revenues of $6.0 million and $19.0 million, respectively, compared to $6.4 million and $19.4 million, respectively, for the comparable prior year period; and operating income of $1.9 million and $4.2 million, respectively, compared to $0.7 million and $2.4 million, respectively, for the comparable prior year period. License fees were higher for the three and nine months ended September 30, 2003 due to a large contract with one customer expanding its use of already licensed systems and sales of our newer web based products to existing customers. Service revenues decreased due to fewer demands for upgrades in the installed base.

AXSPoint Solutions had license fee revenues of $0.4 million and $1.0 million, respectively, for the three and nine months ended September 30, 2003, compared to $0.8 million and $1.6 million, respectively, for the comparable prior year period; services revenue of $1.1 million and $3.4 million, respectively, compared to $1.0 million and $3.2 million, respectively, for the comparable prior year period and operating income of $0.6 million and $1.9 million, respectively, as compared to $1.2 million and $2.8 million, respectively, for the comparable prior year period. The increase in service revenues was mainly due to an increase in maintenance revenues due to customary annual increases and new contracts.

Tivity Solutions had no license fee revenues for the three or nine months ended September 30, 2003, as compared to $23 thousand and $0.3 million, respectively, for the comparable prior year period; service revenues of $0.5 million and $1.5 million, respectively, as compared to $0.7 million and $2.0 million, respectively, for the comparable prior year period and operating income of $0.3 million and $0.2 million, respectively, as compared to $0.2 million and $0.2 million, respectively, for the comparable prior year period. The decrease in license fee revenues for the nine months ended September 30, 2003 from the comparable prior year period was due to lack of any sales to new or existing customers. The decrease in service revenues for the three and nine months ended September 30, 2003 as compared to the comparable prior year period is due to decreases in both consulting and maintenance revenues from the installed base.

Critical Accounting Policies

Our critical accounting policies are as follows:

• Revenue recognition and

• Capitalized software development costs.

Revenue Recognition

We derive our revenue from primarily two sources: (i) software licenses and (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 from joint ventures (approximately 1% of

total revenue in 2002) entered into during 2001 by our South Africa operations. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

We license our software products on a perpetual basis. Each license agreement generally includes a provision for initial post-contract support (maintenance). For all license sales we use a signed license agreement as evidence of an arrangement. For maintenance fees, we use a maintenance agreement as evidence of the arrangement. We use a professional 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 master agreements governing the relationship.

We recognize revenue in accordance with Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), and Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. In multiple element arrangements, we defer the VSOE related to the undelivered elements and recognize revenue on the delivered elements using the residual method. The most commonly deferred element is initial maintenance, which is recognized on a straight-line basis over the initial maintenance term. The VSOE of maintenance is determined by using a consistent percentage of maintenance fee to license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis 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 fee is fixed and determinable and whether or not collection is probable. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from invoice date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.

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

Revenues from joint ventures (included in Revenues: Other-Related Parties in the our Consolidated Statements of Operations) includes consulting revenue for the joint venture’s use of our South African subsidiary’s consultants (2003 only) and for management and director’s fees for our subsidiary providing managerial, technical and other related services to the joint ventures (2002 and 2003 periods) in accordance with the joint venture agreements. Revenue is recognized upon performance of the services.

We assess assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.

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

Capitalized Software Development Costs

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

Liquidity and 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 since that date have made available additional term loans (See Note 2 to the Consolidated Interim Financial Statements). The available amount under the revolving line of credit at September 30, 2003 was approximately $1.0 million. The available amount under the term loans at September 30, 2003 was $0.5 million.

We are required to comply with quarterly and annual financial statement reporting requirements, as well as certain restrictive financial and other covenants. The ability to continue to borrow under the Agreement is dependent upon future compliance with such covenants and available collateral. Management believes that our projected operating results throughout 2003 will result in compliance under the Agreement, although there can be no assurances that such operating results will be achieved.

Our operating activities provided (used) cash of $(0.5) million and $1.1 million for the nine months ended September 30, 2002 and 2003, respectively. Net cash used by operating activities during the nine months ended September 30, 2002 was comprised primarily of an increase in accounts receivable, a decrease in accounts payable and accrued expenses and a decrease in deferred revenue partially offset by the net income and depreciation and amortization expense. Net cash provided by operating activities during the nine months ended September 30, 2003 was comprised primarily of the net income and depreciation and amortization expense partially offset by decreases in accounts payable and accrued expenses and in deferred revenue.

Our investing activities used cash of $0.8 million and $1.3 million for the nine months ended September 30, 2002 and 2003, respectively. For the nine months ended September 30, 2002 uses of cash were primarily for capitalized software development costs, equipment purchases and loans to joint ventures, partially offset by proceeds from sale of subsidiary. The principal uses during 2003 were for equipment purchases, capitalized software development costs and loans to the joint venture.

Cash provided by (used in) financing activities was $0.7 million and $(1.3) million for the nine months ended September 30, 2002 and 2003, respectively. Cash provided by financing activities for the nine months ended September 30, 2002 related mainly to proceeds from the issuance of debt partially offset by repayments of debt. Cash used by financing activities for the nine months ended September 30, 2003 was related to the repayment of debt.

We have no significant capital commitments. Planned capital expenditures for 2003 total approximately $1.4 million, including any software development costs that may qualify for capitalization under SFAS 86. Our aggregate minimum operating lease payments for 2003 will be approximately $1.8 million. We generated net income of $1.9 million for the year ended December 31, 2002 after experiencing net losses of $0.3 million and $4.7 million during the years ended December 31, 2000 and 2001, respectively. For the nine months ended September 30, 2003, we have experienced an increase in license fee revenues which, along with service revenues, had declined in each of the three years ended December 31, 2002 as a result of intense competition and rapid technological change together with a slowing of the economy. The increased license fee revenue along with management’s initiatives over the last two years to improve operating results and liquidity and better position AXS-One to compete under current market conditions have allowed us to generate net income during the last nine quarters ending September 30, 2003. In addition, during the month of October 2003, we extended our maintenance agreement with one customer through December 2005 and received $2.8 million in cash. Due to these factors we expect that our operating cash flow and available financial resources will be sufficient to fund our working capital requirements through 2003. However, our ability to achieve the anticipated results is affected by the extent of cash generated from operations and the pace at which we utilize our available resources. There is also the risk that cash held by our foreign 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 is subject to various foreign government restrictions. Accordingly, we may in the future be required to seek additional sources of financing or future accommodations from our existing lender. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing or lender accommodations will be available.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Certain Factors That May Affect Future Results and Financial Condition and the Market Price of Securities

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

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of September 30, 2003 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our

disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries would be collected and made known to them by others within those entities as appropriate to allow timely decisions regarding required disclosure of such information.

Changes in internal controls

There were no significant changes in our internal controls over financial reporting or, to our knowledge, in other factors, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting either during the third fiscal quarter or subsequent to the Evaluation Date.

AXS-ONE INC.

Part II

Other Information

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

On October 1, 2002, the Company entered into an agreement with a South Carolina corporation to provide investor relations services to the Company, whereby upon expiration or termination of the agreement the Company would issue warrants to purchase the number of shares of common stock of the Company which is equal to the product of 10,000 shares multiplied by the number of whole months during the actual term of the agreement to a maximum of 120,000 shares. The exercise price for the warrants is (i) for the initial up to 60,000 shares covered by the warrants, $0.41 per share, which represents the closing price of the Company’s common stock on October 1, 2002 and (ii) for the remaining shares covered by the warrants, if any, the closing price of the Company’s common stock on April 1, 2003, which was $0.59 per share. The warrants are fully vested on the date of their issuance by the Company.

On September 30, 2003, the Company issued two (2) warrants, each to purchase 60,000 shares of the Common Stock of AXS-One, one with an exercise price of $0.41 per share and one with an exercise price of $0.59 per share in accordance with the agreement. The expiration date of both warrants is September 30, 2006. As of September 30, 2003 no warrants were exercised.

The accounting for these warrants was determined in accordance with EITF Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” and, as a result, the fair value of the warrants was being recognized as an expense over the vesting period using variable accounting. Total expenses of $34 thousand for the nine months ended September 30, 2003 were recorded in sales and marketing expense on the consolidated interim financial statements. No further compensation costs will be recognized related to these warrants since the warrants are fully vested.

Issuance of the warrants was not registered under the Securities Act of 1933, as amended (the “Act”) in reliance upon Section 4(2) of the Act based on the fact that the warrants were issued to only one sophisticated investor who had extensive knowledge of the Company at the time of the issuance.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits—

Exhibit 4.5		Form of Warrants (2003)
Exhibit 10.60		Employment agreement between the Company and Gennaro Vendome
Exhibit 31		Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32		Officer Certifications under 18 USC 1350

(b) Reports on Form 8-K—

On July 31, 2003, the Company furnished a Form 8-K reporting the issue of a press release disclosing material non-public information regarding the Registrant’s results of operations for the three and six months ended June 30, 2003.

AXS-ONE INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AXS-ONE INC.

Date: November 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)