To the Board of Directors

Enterprise Informatics Inc.

San Diego, California

 

We have audited the consolidated balance sheets of Enterprise Informatics Inc. (the "Company") as of September 30, 2007 and 2006, and the related consolidated statements of operations, comprehensive income, shareholders’ deficit, and cash flows for each of the three years in the period ended September 30, 2007. Our audits also included the financial statement schedule of Enterprise Informatics Inc. listed in Item 15(a).  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provided a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enterprise Informatics Inc. as of September 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

 

Los Angeles, California

January 15, 2008

 

 

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                                           ENTERPRISE INFORMATICS INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	553,000			$	95,000
Receivables, net			746,000				854,000
Other current assets			204,000				190,000
Total current assets			1,503,000				1,139,000
Property and equipment, net			211,000				131,000
Computer software, net			321,000				425,000
Other assets			27,000				28,000
Total assets		$	2,062,000			$	1,723,000
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	338,000			$	792,000
Note and accrued interest payable to Spescom Ltd.			—				550,000
Preferred stock dividend payable to Spescom Ltd.			1,233,000				887,000
Accrued liabilities			1,465,000				1,446,000
Lease obligations– current portion			32,000				44,000
Deferred revenue			2,611,000				2,752,000
Series I redeemable preferred stock, par value $0.01 per share, 2,450 shares authorized; 2,450
shares issued and outstanding in 2006			—				2,450,000
Total current liabilities			5,679,000				8,921,000
Notes and accrued interest payable to Spescom Ltd.			676,000				664,000
Lease obligations			55,000				16,000
Total liabilities			6,410,000				9,601,000
Shareholders’ deficit:
Convertible preferred stock, 243,239 remaining shares authorized
Series F - par value $1.00 per share; 5,291 shares authorized, issued and
outstanding in 2007 and 2006			6,790,000				6,790,000
Series I - par value $0.01 per share; 2,450 shares authorized;
2,450 shares issued and outstanding in 2007			2,450,000				—
Common stock, no par value, 100,000,000 shares authorized; 37,503,523 and 37,144,494
shares issued and outstanding in 2007 and 2006			76,495,000				76,581,000
Common stock warrants			1,505,000				1,505,000
Accumulated other comprehensive loss			(537,000	)			(441,000	)
Accumulated deficit			(91,051,000	)			(92,313,000	)
Total shareholders’ deficit			(4,348,000	)			(7,878,000	)
Total liabilities and shareholders’ deficit		$	2,062,000			$	1,723,000

 

 

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

 

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ENTERPRISE INFORMATICS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Years ended September 30,
		2007				2006				2005
Revenues:
Licenses		$	3,107,000			$	1,775,000			$	737,000
Services and other			5,867,000				5,231,000				5,088,000
Total revenues			8,974,000				7,006,000				5,825,000
Cost of revenues:
Licenses			169,000				324,000				206,000
Services and other			2,477,000				2,370,000				2,232,000
Total cost of revenues			2,646,000				2,694,000				2,438,000
Gross profit			6,328,000				4,312,000				3,387,000
Operating expenses:
Research and development			1,152,000				1,058,000				852,000
Marketing and sales			1,936,000				2,410,000				3,799,000
General and administrative			1,719,000				1,622,000				1,994,000
			4,807,000				5,090,000				6,645,000
Income (loss) from operations			1,521,000				(778,000	)			(3,258,000	)
Interest and other income			2,000				4,000				1,000
Interest and other expense			(261,000	)			(248,000	)			(291,000	)
Net income (loss)			1,262,000				(1,022,000	)			(3,548,000	)
Deemed preferred dividend			—				(1,000,000	)			(2,200,000	)
Net income (loss) available after deemed preferred dividend			1,262,000				(2,022,000	)			(5,748,000	)
Cumulative preferred dividends			(264,000	)			(354,000	)			(301,000	)
Net income (loss) available to common shareholders		$	998,000			$	(2,376,000	)		$	(6,049,000	)
Earnings per share:
Basic		$	0.03			$	(0.06	)		$	(0.17	)
Diluted		$	0.02			$	(0.06	)		$	(0.17	)
Weighted average shares outstanding:
Basic			37,324,000				36,876,000				34,941,000
Diluted			49,841,000				36,876,000				34,941,000
Statement of Comprehensive Loss
Net income (loss)		$	1,262,000			$	(1,022,000	)		$	(3,548,000	)
Other Comprehensive income (loss):
Foreign currency translation adjustment			(96,000	)			(88,000	)			34,000
Comprehensive income (loss)		$	1,166,000			$	(1,110,000	)		$	(3,514,000	)

 

 

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

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                                             ENTERPRISE INFORMATICS INC.

Years Ended September 30, 2007, 2006 and 2005

(In thousands except preferred share data)

																						Accumulated
																						Other
		Preferred Stock								Common Stock								Stock				Comprehensive				Accumulated								Comprehensive
		Share				Amount				Share				Amount				Warrants				Income				Deficit				Total				Income (Loss)
Balance at September 30, 2004			5,291				6,790				34,143				74,726				278				(387	)			(84,543	)			(3,136	)
Exercise of stock options			—				—				74				10				—				—				—				10
Issuance of Series G Preferred
Stock  &  Warrants( see Note 6)			2,200				2,200				—				552				1,197				—				(2,200	)			1,749
Preferred Stock dividend Series F			—				—				—				(264	)			—				—				—				(264	)
Preferred Stock dividend Series G			—				—				82				—				—				—				—				—
Warrants issued for services			—				—				—				—				30				—				—				30
Expiration of warrants			—				—				—				133				(133	)			—				—				—
Conversion of Series G Preferred
Stock into Commn Stock			(750	)			(750	)			2,428				750				—				—				—				—
Warrants exercised			—				—				91				31				(13	)			—				—				18
Extension of expiration date of
warrants (see Note 7)			—				—				—				—				147				—				—				147
Foreign currency translation
adjustment			—				—				—				—				—				34				—				34			$	34
Net  loss			—				—				—				—				—				—				(3,548	)			(3,548	)			(3,548	)
Total comprehensive loss			—				—				—				—				—				—				—				—			$	(3,514	)
Balance at September 30, 2005			6,741			$	8,240				36,818			$	75,938			$	1,506			$	(353	)		$	(90,291	)		$	(4,960	)
Exhange Series G Preferred Stock
for Series H Preferred Stock			(1,450	)			(1,450	)			—				—				—				—				—				(1,450	)
(See Note 6)
Issuance of Series H Preferred
Stock (see Note 6)			1,950				1,950				326				303				133				—				(500	)			1,886
Exchange Series H Preferred Stock
for Series I Preferred Stock			(1,950	)			(1,950	)			—				—				—				—				—				(1,950	)
Issuance of Series I Preferred
Stock (see Note 6)			2,450				2,450				—				175				—				—				(500	)			2,125
Reclass of Series I Preferred Stock
to current liabilities (see Note 6)			(2,450	)			(2,450	)			—				—				105				—				—				(2,345	)
Preferred Stock dividend Series F			—				—				—				(264	)			—				—				—				(264	)
Preferred Stock dividend Series I			—				—				—				(46	)			—				—				—				(46	)
Warrants issued for services			—				—				—				—				40				—				—				40
Expiration of warrants			—				—				—				279				(279	)			—				—				—
FAS 123 period charge for
employee stock options			—				—				—				196				—				—				—				196
Foreign currency translation
adjustment			—				—				—				—				—				(88	)			—				(88	)		$	(88	)
Net  loss			—				—				—				—				—				—				(1,022	)			(1,022	)			(1,022	)
Total comprehensive loss			—				—				—				—				—				—				—				—			$	(1,110	)
Balance at September 30, 2006			5,291			$	6,790				37,144			$	76,581			$	1,505			$	(441	)		$	(92,313	)		$	(7,878	)
Preferred Stock dividend Series F			—				—				—				(264	)			—				—				—				(264	)
Options issued for services			—				—				—				—				55				—				—				55
Cashless exercise			—				—				289				55				(55	)			—				—				0
Exercise of stock options			—				—				70				9				—				—				—				9
FAS 123 period charge for
employee stock options			—				—				—				114				—				—				—				114
Reclass of Series I Preferred Stock
to Equity (see Note 6)			2,450				2,450				—				—				—				—				—				2,450
Foreign currency translation			—				—				—				—				—				(96	)			—				(96	)		$	(96	)
Net  loss			—				—				—				—				—				—				1,262				1,262				1,262
Total comprehensive loss			—				—				—				—				—				—				—				—			$	1,166
Balance at September 30, 2007			7,741			$	9,240				37,503			$	76,495			$	1,505			$	(537	)		$	(91,051	)		$	(4,348	)

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

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     ENTERPRISE INFORMATICS INC.

   CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Years ended September 30,
		2007				2006				2005
Cash flows from operating activities:
Net income (loss)		$	1,262,000			$	(1,022,000	)		$	(3,548,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			173,000				167,000				84,000
Loss on disposal of assets			6,000				—				—
Unpaid interest on notes payable			227,000				253,000				135,000
Deferral of professional service charge from Spescom Ltd.			—				—				302,000
Share-based compensation			114,000				196,000				—
Impairment of capitalized software			—				—				36,000
Extension of expiration date on warrants			—				—				147,000
Compensation for options issued to consultants			55,000				40,000				30,000
Changes in assets and liabilities:
Receivables, net			122,000				(222,000	)			333,000
Other current assets			(6,000	)			(115,000	)			228,000
Accounts payable			(476,000	)			416,000				(68,000	)
Payable to Spescom Ltd.			(578,000	)			(7,000	)			20,000
Accrued liabilities			(101,000	)			(133,000	)			156,000
Deferred revenue			(231,000	)			(346,000	)			1,119,000
Net cash provided (used) in operating activities			567,000				(773,000	)			(1,026,000	)
Cash flows from investing activities:
Purchases of property and equipment			(83,000	)			(43,000	)			(14,000	)
Capitalization of software development costs			—				(35,000	)			(514,000	)
Purchases of software			-				—				(39,000	)
Net cash used in investing activities			(83,000	)			(78,000	)			(567,000	)
Cash flows from financing activities:
Proceeds from exercise of stock options			9,000				—				10,000
Proceeds from exercise of warrants			—				—				18,000
Net proceeds from private placement of preferred stock			—				716,000				1,750,000
Payments on capital lease obligations			(42,000	)			(40,000	)			(31,000	)
Net cash (used) provided by financing activities			(33,000	)			676,000				1,747,000
Effect of exchange rate changes on cash			7,000				(15,000	)			22,000
Net increase (decrease) in cash and cash equivalents			458,000				(190,000	)			176,000
Cash and cash equivalents at beginning of period			95,000				285,000				109,000
Cash and cash equivalents at end of period		$	553,000			$	95,000			$	285,000

 

*See Note 1 for supplemental cash flow information.

 

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

 

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                                        ENTERPRISE INFORMATICS INC.

 

Note 1—The Company and Summary of Significant Accounting Policies

 

The Company

 

The Company develops markets and supports a suite of integrated document, configuration and records management software products. These products were developed to enable customers in a broad range of industries, including utilities, transportation and state and local governments among others to effectively and efficiently manage, share and distribute critical business information, expertise and other intellectual capital.  The Company is headquartered in San Diego, California with an international sales and support subsidiary in London, UK.

 

Principles of Consolidation

 

The consolidated financial statements are prepared using accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned United Kingdom subsidiary, Enterprise Informatics Ltd. All significant intercompany balances and transactions have been eliminated.

 

Foreign Currency

 

The functional currency of the Company’s United Kingdom subsidiary is the pound sterling. Assets and liabilities are translated into U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average exchange rates in effect for the period. Net currency exchange gains or losses resulting from such translations are excluded from net income and are accumulated in a separate component of shareholders’ deficit as accumulated other comprehensive income(loss). Gains and losses resulting from foreign currency transactions, which are not significant, are included in the consolidated statements of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include revenue recognition estimates, the viability of recognizing deferred income tax assets, capitalized software costs and the valuation of equity instruments, and the allowance for doubtful accounts.

 

Revenue Recognition

 

The Company’s revenues are derived from sales of its document and configuration management systems that are primarily composed of software and services, including maintenance, training and consulting services, and third party software and hardware. The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2 “Software Revenue Recognition,”  SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”, Staff Accounting Bulletin (“SAB”) No. 101, updated by SAB’s 103 and 104 “Update of Codification of Staff Accounting Bulletins,” and Emerging Issues Task Force No. 00-21 (“EITF 00-21”) “Accounting for Revenue Arrangements with Multiple Deliverables.”  Revenue through the Company’s Value Added Resellers (“VARS”) are net of any VAR discount in accordance with EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent.”

 

Software license and third party product revenues are recognized upon shipment of the product if no significant vendor obligations remain and collection is probable. In cases where a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. For new software products where a historical record has not yet been demonstrated that acceptance is perfunctory, the Company defers recognition of revenue until acceptance has occurred. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered element until delivery occurs.  If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.  Annual maintenance revenues, which consist of ongoing support and product updates, are recognized on a straight-line basis over the term of the contract. Payments received in advance of performance of the related service for maintenance contracts are recorded as deferred revenue. Revenues from training and consulting services are recognized when the services are performed and adequate evidence of providing such services is available. Contract revenues for long-term contracts or programs requiring specialized systems are recognized using the percentage-of-completion method of accounting, primarily based on contract labor hours incurred to date compared with total estimated labor hours at completion. Provisions for anticipated contract losses are recognized at the time they become known.

 

Contracts are billed based on the terms of the contract. There are no retentions in billed contract receivables. Unbilled contract receivables relate to revenues earned but not billed at the end of the period.

 

The Company considers many factors when applying U.S. generally accepted accounting principles related to revenue recognition.  These factors include, but are not limited to:

 

·            The actual contractual terms, such as payment terms, delivery dates, and pricing of the various product and service elements of a contract

 

·            Availability of products to be delivered

 

·            Time period over which services are to be performed

 

·            Creditworthiness of the customer

 

·            The complexity of customizations to the Company’s software required by service contracts

 

·            The sales channel through which the sale is made (direct, VAR, distributor, etc.)

 

·            Discounts given for each element of a contract

 

·            Any commitments made as to installation or implementation of “go live” dates

 

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Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer.  Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards.  Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse effect on the Company’s future operating results.

 

Fair Value of Financial Instruments

 

Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures About Fair Value of Financial Instruments”, requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as cash or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity, and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. At September 30, 2007 and 2006, management believes that the carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and accounts payable, and accrued expenses approximate fair value because of the short maturity of these financial instruments. The Company believes that the carrying value of its loans, leases and lines of credit approximate their fair values based on current market rates of interest.

 

Concentration of Credit Risk

 

The Company provides products and services to customers in a variety of industries worldwide, including local governments, petrochemicals, utilities, manufacturing and transportation. Concentration of credit risk with respect to trade receivables is limited due to the geographic and industry dispersion of the Company’s customer base. The Company has not experienced significant credit losses on its customer accounts.

 

A small number of customers has typically accounted for a large percentage of the Company’s annual revenues. Aveva Solutions Limited and Network Rail accounted for 25% and 12% of revenue for fiscal 2007.  Constellation Energy Group accounted for 13% of revenues for fiscal 2006, while Network Rail accounted for 16% of revenues for fiscal 2005. 

 

 Property, Equipment and Purchased Software

 

Property and equipment is recorded at cost and depreciated using the straight-line method over useful lives of two to seven years.   Purchased software is recorded at cost and amortized using the straight-line method over the useful lives of one to five years.  Leasehold improvements are amortized on a straight-line basis over the shorter of their useful life or the term of the related lease.

 

Accumulated depreciation and amortization of property, equipment and purchased software was $584,000 and $1,400,000 at September 30, 2007 and 2006, respectively. In fiscal 2007 the Company reduced its office space and disposed of obsolete and virtually fully amortized property and equipment totaling $905,000 with a related accumulated depreciation of $899,000. Depreciation expense was $70,000, $79,000 and $83,000 for the years ended September 30, 2007, 2006 and 2005, respectively.  Expenditures for ordinary repairs and maintenance are expensed as incurred while major additions and improvements are capitalized.

 

Software Development Costs

 

Software development costs are capitalized when technological feasibility and marketability of the related product have been established. Software development costs incurred solely in connection with a specific contract are charged to cost of revenues. Capitalized software costs are amortized on a product-by-product basis, beginning when the product is available for general release to customers. In fiscal 2007 the Company did not capitalize internal software development costs.   In fiscal 2006 the Company capitalized $35,000 of internal software development costs, while the Company capitalized $514,000 of internal software developments costs in fiscal 2005.  Annual amortization expense is calculated using the greater of the ratio of each product’s current gross revenues to the total of current and expected gross revenues or the straight-line method over the estimated useful life of three to four years. Accumulated amortization of capitalized software costs was $192,000 and $88,000 at September 30, 2007 and 2006, respectively. The related amortization expense was $104,000 and $87,000 for the years ended September 30, 2007 and 2006, respectively.   The Company has determined that none of its capitalized development costs has been impaired as of September 30, 2007 in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”

 

Long-lived Assets

 

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset’s carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset.  The Company concluded in fiscal 2007 and 2006 that there were no events or changes in circumstances that would indicate that the carrying amounts of long-lived assets were impaired.

 

Share-Based Payments

 

In April 2007, the Company adopted its 2007 Stock Incentive Plan (the “2007 Plan”).  The 2007 Plan is administered by either the Board of Directors or a committee designated by the Board to oversee the plan.  The total number of authorized shares under the 2007 Plan is 7,500,000.  As of September 30, 2007, options to purchase 5,768,000 shares were outstanding, of which 1,692.250 were issued under the 2007 Plan and 4,075,750 were issued under the 1996 Stock Incentive Plan discussed below.   

 

The option vesting period under the 2007 Plan is determined by the Board of Directors or a Stock Option Committee and usually provides that 25% of the options granted can be exercised immediately from the date of grant, and thereafter, those options vest and become exercisable in additional cumulative annual installments of 25% commencing on the first anniversary of the date of grant. Options granted are generally due to expire upon the sooner of ten years from date of grant, the date of termination of services for cause by the Company, twelve months after termination of services due to death or disability, 90 days after termination of services due to retirement in accordance with the Company’s retirement policy, or three months after termination of services other than for cause by the Company or due to death, disability or retirement.  The option exercise price is equal to the fair market value of the common stock on the date of grant.  Options granted to employees under the 2007 Plan may be either incentive stock options or nonqualified options. Options granted to non-employee directors under the 2007 Plan may only be nonqualifies options.

 

In April 1996, the Company adopted its 1996 Stock Incentive Plan (the “1996 Plan”).  The 1996 Plan is administered by either the Board of Directors or a committee designated by the Board to oversee the plan.  The total number of authorized shares under the 1996 Plan was 7,425,000.  As of September 30, 2006, options to purchase 4,455,000 shares were outstanding.   The 1996 Plan expired as of March 31, 2006 and therefore no further grants are available from this Plan.  The Company  adopted a new sock incentive plan in fiscal 2007.

 

The option vesting period under the 1996 Plan was determined by the Board of Directors or a Stock Option Committee and usually provided that 25% of the options granted were exercisable 90 days from the date of grant, and thereafter, those options vest and become exercisable in additional cumulative annual installments of 25% commencing on the first anniversary of the date of grant. Options granted are generally due to expire upon the sooner of ten years from date of grant, thirty days after termination of services other than by reason of convenience of the Company, three months after disability, or one year after the date of the option holder’s death. The option exercise price is equal to the fair market value of the common stock on the date of grant.  Options granted to employees under the 1996 Plan were either incentive stock options or nonqualified options. Only nonqualified options were granted to non-employee directors.

 

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In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,” which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the effective dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R were effective for the Company beginning in the quarter ended December 31, 2005.

 

Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company has no awards with market or performance conditions. The Company adopted the provisions of FAS 123R on October 1, 2005, the first day of the Company’s fiscal year 2006, using a modified prospective application, which provides for certain changes to the method for valuing share-based compensation. Under the modified prospective application, prior periods are not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123).

 

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants:

 

		Years ended September 30,
		2007				2006
Dividend Yield			0	%			0	%
Expected Volatility			222	%			391	%
Risk free interest rate			4.5	%			4.7	%
Expected lives			10				10

 

The weighted-average estimated fair value of employee stock options granted during fiscal 2007 and fiscal 2006 using the Black-Scholes model were as follows: 

 

		Years ended September 30,
		2007				2006
Research and development		$	7,000			$	10,000
Marketing and sales			36,000				63,000
General and administrative			71,000				123,000
Share-based compensation		$	114,000			$	196,000
Basic and diluted net income (loss) per share attributable to common shareholders
Basic		$	0.03			$	(0.06	)
Diluted		$	0.02			$	(0.06	)

 

A summary of option activity under the Plan as of September 30, 2007, and changes during the fiscal year then ended is presented below:

 

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Shares				Exercise				Contractual				Intrinsic
Options			(000)			Price				Term				Value
Outstanding Options at September 30, 2006			4,455			$	0.28
Granted			1,696			$	0.14
Exercised			(70	)		$	0.13
Forfeited or expired			(313	)		$	0.41
Outstanding at September  30, 2007			5,768			$	0.24				7.1			$	-
Exercisable at September 30, 2007			3,942			$	0.28				5.8			$	-

 

The weighted-average grant-date fair values of options granted during the fiscal years ended September 30, 2007 and 2006 were $0.14 and $0.12, respectively, per share. 

 

Stock-Based Compensation under FAS 123 for Periods Prior to Fiscal 2006

 

The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net loss and basic and diluted net loss per share as if the fair value-based method had been applied in measuring compensation expense. The Company applies SFAS No.123, Accounting for Stock-Based Compensation and Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its employee stock-based compensation plan.

 

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No compensation cost was recognized for employee stock option grants during 2005 based upon the intrinsic value method, which were fixed in nature, as the options were granted at exercise prices equal to fair market value on the date of grant. Had compensation cost for the Company’s employee stock-based compensation plan been determined based on the fair value at the grant dates the disclosure requirements of SFAS 148, which amends the disclosure requirements of FAS 123, would have been as follows:

 

		Year ended
		September 30,
		2005
Net income (loss) used in computing net income (loss) per share
As reported		$	(6,049,000	)
Add: Total stock based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects			(190,000	)
Pro forma		$	(6,239,000	)
Basic and diluted net loss per share
As reported		$	(0.17	)
Pro forma		$	(0.18	)

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants:

 

		Year ended
		September 30,
		2005
Dividend yield			0	%
Expected volatility			154	%
Risk free interest rate			4	%
Expected lives (years)			10

 

Income Taxes

 

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences resulting from the differences in the financial reporting and tax bases of assets and liabilities. Deferred income tax expense (benefit) is the change during the year in the deferred income tax asset or liability. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be “more likely than not” realized in the future based on the Company’s current and expected operating results.

 

Net Loss per Common Share

 

Basic net income (loss) per common share is computed as net loss divided by the weighted average number of common shares outstanding during the year. Diluted net loss per common share is computed as net loss divided by the weighted average number of common shares and potential common shares, using the treasury stock method, outstanding during the year and assumes conversion into common stock at the beginning of each period of all outstanding shares of convertible preferred stock, stock options, warrants and other potential common stock. Computations of diluted net loss per share do not give effect to individual potential common stock for any period in which their inclusion would be anti-dilutive.

 

Statements of Cash Flows

 

The following table provides supplemental cash flow information:

 

		Years ended September 30,
		2007				2006				2005
Supplemental cash flow information:
Interest paid		$	95,000			$	12,000			$	12,000
Non-cash financing and investing activities:
Deemed preferred dividend on private placement		$	-			$	1,000,000			$	2,200,000
Expiration of warrants		$	-			$	279,000			$	133,000
Accrued preferred stock dividends		$	264,000			$	310,000			$	265,000
Acquisition of equipment under capital lease		$	69,000			$	-			$	68,000
Preferred stock coversion to common stock		$	-			$	44,000			$	-
Beneficial conversion of Series H		$	-			$	762,000			$	-

 

Note 2—Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for us beginning October 1, 2007. We are in the process of determining the effect, if any, the adoption of FIN 48 will have on our financial statements.

 

In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157 defines fair value, established a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. FAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007. The

Company has not determined the impact, if any, the adoption of FAS 157 will have on its financial position and results of operations.

 

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In September 2006, the FASB issued FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize the changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. FAS 158 was effective for us as of the end of the fiscal year ending after December 15, 2006. We do not expect the adoption of FAS 158 to significantly affect our financial condition or results of operations.

 

In September 2006, the SEC released SAB 108 to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 states that if correcting an error in the current year materially affects the current year’s income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not expect the adoption of SAB 108 to significantly affect our financial condition or results of operations.

 

In October 2006, the FASB issued FAS 123R-5, “Amendment of FASB Staff Position FAS 123R-1,” to address whether a modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FAS 123R-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. FAS 123R.” The provisions in FAS 123R-5 are effective for us in the quarter beginning January 1, 2007. We do not expect the adoption of FAS 123R-5 to significantly affect our financial condition or results of operations.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact, if any, the adoption of SFAS 159 will have on its financial position and results of operations.

 

Note 3 – Spescom Ltd. Transactions and Related Parties

 

As of September 30, 2007 and 2006 there were 5,291 shares of Series F Convertible Preferred Stock with a stated value of $1,000 per share held by Spescom Ltd., the then majority shareholder of the Company. The Series F Convertible Preferred Stock was originally convertible into common stock, at a stated conversion price of $0.45 per share subject to certain anti-dilution provisions. As a result of these anti-dilution provisions and the issuance of the Series I Convertible Preferred Stock in March 2006, the conversion price has been adjusted to $0.39 per share. The conversion is at the option of the holder of the Series F Convertible Preferred Stock through September 30, 2008. The outstanding Series F Convertible Preferred Stock is entitled to receive dividends of 5% of the stated value of $1,000 per share per annum, payable on a quarterly basis in cash or common stock (valued on the basis of the average per share market value on the 30 trading days immediately prior to the date on which such dividend is declared by the Board of Directors).  Unpaid dividends accrue interest at the rate of 8% per annum.  As of September 30, 2007, unpaid dividends and accrued interest amounted to $1,058,000 and $175,000, respectively. As of September 30, 2006, unpaid dividends and accrued interest amounted to $794,000 and $93,000, respectively.  The Series F Convertible Preferred Stock is convertible at the currently effective conversion price based on the stated value of the Series F Convertible Preferred Stock and the amount of unpaid accrued dividends interest thereon.  Subsequent to yearend, Spescom Ltd. sold all of its interests in the Company to ERP2 Holdings, LLC.  See Note 13-Subsequent Events.

 

Related party liabilities consist of the following:

 

		Years ended September 30,
		2007				2006
Notes and accrued interest payable on demand - Spescom UK		$	-			$	16,000
Payable to Spescom UK			-				197,000
Payable to Spescom Ltd.			-				337,000
Payable to Spescom Ltd.		$	-			$	550,000
Notes and accrued interest payable on demand - Spescom UK		$	676,000			$	664,000
Notes and accrued interest payable to Spescom Ltd.		$	676,000			$	664,000

 

As of September 30, 2007, the Company had two existing demand notes payable to Spescom Ltd. UK, a wholly owned subsidiary of Spescom Ltd., for the original principal amounts of $400,000 and $500,000, each bearing interest at the rate of 10% per annum.  As of September 30, 2007 and 2006, the balance owed on the notes including interest was $676,000 and $680,000, respectively. Interest expense on the notes was $73,000 and $65,000 for the years ended September 30, 2007 and 2006, respectively.  These notes were collateralized by a security interest in favor of both Spescom Ltd. and Spescom Ltd. UK in respect of all the Company’s assets. In November 2005 the Company’s wholly owned subsidiary, Enterprise Informatics Ltd. agreed to guarantee certain loan obligations of Spescom Ltd. which totaled $1.2 million as of September 30, 2007.  The proceeds of these loans had been used by Spescom Ltd. in prior years to provide working capital to the Company. The guarantee was secured by the assets of Enterprise Informatics Ltd., which totaled $563,000 as of September 30, 2007.  Upon Spescom Ltd.’s sale in October 2007 of its interest in the Company to ERP2 Holdings, LLC ("ERP2"), which included the sale of the two notes, Enterprise Informatics Ltd. is no longer obligated under the guarantee. In addition, on January 14, 2008, the Company and ERP2 entered into a term sheet that provides, among other things, for (i) the extension of the maturity date of the notes acquired by ERP2 from Spescom Ltd. to the date that is two years from the date of issuance of certain additional notes pursuant to the term sheet , and (ii) the agreement of ERP2 not to call such notes following an event of default, prior to September 30, 2008.

 

Under a royalty arrangement beginning in fiscal 2004, Spescom Ltd. resold the Company’s software and maintenance services in South Africa. In February 2006 the royalty arrangement with Spescom Ltd. was terminated and the company entered into a new reseller arrangement with a third party company, DocQnet International, for the South African market. As part of the termination the Company assumed responsibility for the remaining maintenance obligations owed by Spescom Ltd. to their customers.  The deferred maintenance obligation assumed totaled $99,000 and was deducted from the payable balance owed by the Company to Spescom Ltd. There were no royalty revenues recognized under the royalty agreement with Spescom Ltd. for the year ended September 30, 2007, while the royalty revenue recognized for the years ended September 30, 2006 and 2005 were $117,000 and $81,000, respectively.  In September 2005, Spescom Ltd. performed certain marketing and business development projects for the Company along with assisting in raising working capital.  As of September 30, 2006, the outstanding balance owed to Spescom Ltd. for these services and accrued interest amounted to $302,000 and $35,000, respectively. In January 2007, the outstanding balance, including accrued interest, was paid in full.

 

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Prior to February 10, 2006, Spescom Ltd. UK provided certain administrative and accounting functions for the Company’s United Kingdom subsidiary.  The Company was billed a monthly fee by Spescom Ltd. UK for reimbursement of certain costs in the United Kingdom including the office facilities, all accounting and human resources services, and certain corporate marketing activities. After February 10, 2006, Spescom Ltd. no longer provided these administrative or accounting functions and the Company’s United Kingdom subsidiary relocated to another facility.  For the year ended September 30, 2007 there were no administrative fees or rent fees charged by Spescom Ltd. UK.  For the years ended September 30, 2006 and 2005 the administrative fees totaled $226,000 and $605,000, respectively. The office rent included in the administrative fee totaled $132,000 and $354,000, respectively, for the years ended September 30, 2006 and 2005. At September 30, 2006, the Company had a payable to Spescom Ltd. UK of $213,000, which was paid in full in fiscal year 2007. In 1999, as part of an agreement to sell a 60% interest in its United Kingdom subsidiary to Spescom Ltd., the lease for the United Kingdom office facility was to be assigned to Spescom Ltd. UK; however, the landlord did not grant its consent to the assignment and as such Spescom Ltd.UK has paid the lease for the entire office directly to the landlord.  The lease expired on March 14, 2006.  The landlord has claimed that the Company owes certain dilapidation payments under the lease.  The Company has disputed such claims and believes there will be no material effect once resolved.

 

Since February 10, 2006 the Company has provided certain accounting and administrative functions at fair value for Spescom Ltd. UK.  The Company has received compensation of $34,000 and $20,000 for the year ended September 30, 2007 and 2006, respectively, for the accounting and administrative services rendered.

 

Note 4 – Balance Sheet Information

 

		September 30,
		2007				2006
Receivables, net:
Receivables		$	754,000			$	767,000
Unbilled receivables			—				96,000
			754,000				863,000
Less:  allowance for doubtful accounts			(8,000	)			(9,000	)
		$	746,000			$	854,000
Property and equipment, net:
Computer equipment		$	265,000			$	1,035,000
Purchase software			297,000				252,000
Equipment under capital leases			178,000				148,000
Furniture & fixtures			21,000				73,000
Leasehold improvements			33,000				23,000
			794,000				1,531,000
Less accumulated depreciation  & amortization			(584,000	)			(1,400,000	)
		$	210,000			$	131,000
Accrued liabilities
Accrued vacation		$	343,000			$	331,000
Employee compensation and related expenses			215,000				326,000
Accrued dividends			56,000				46,000
Customer deposits			391,000				327,000
Accrued audit and tax fees			153,000				121,000
VAT and sales tax payable			52,000				29,000
Accrued deferred rent			80,000				106,000
Other			175,000				160,000
		$	1,465,000			$	1,446,000

 

Note 5 – Reconciliation of Net Loss and Shares Used in Per Share Computations:

 

Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options, stock awards and shared performance stock awards using the “treasury stock” method. The components of basic and diluted earnings per share were as follows:

 

		Years ended September 30,
		2007				2006				2005
Net income (loss) available for common shareholders		$	998,000			$	(2,376,000	)		$	(6,049,000	)
Common stock and common stock equivalents
Basis			37,324,000				36,876,000				34,941,000
Diluted			49,841,000				36,876,000				34,941,000

 

For the years September 30, 2007, 2006 and 2005, shares totaling 5,768,000, 4,883,000 and 1,541,000, respectively, attributable to outstanding stock options, were excluded in the calculation of diluted earnings per share.

 

In September 2003, the Company issued an option to purchase 2,500,000 shares of common stock to an investment consulting firm involved in a private placement and the Company issued 5,291 shares of Series F Preferred Stock to Spescom Ltd. and Spescom

 

UK with a stated value of $1,000 per share which were originally convertible into the Company’s common stock at a stated conversion price of $0.45 per share, subject to certain adjustments to prevent dilution, representing, as of the date of issuance, a total of 11,757,778 shares of common stock.  Also in September 2003, the Company issued warrants to investors who participated in the private placement to purchase 1,008,335 shares of the Company’s common stock.  In November 2004 the Company issued 2,200 shares of Series G Preferred Stock along with certain warrants to purchase 2,197,000 shares of common stock.  The stock options, warrants and convertible preferred stock were excluded from calculations of per share amounts, because their effect would be antidilutive for all periods.

 

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Note 6 — Redeemable and Convertible Preferred Stock

 

March 2006 Private Placement

 

On March 10, 2006, the Company completed a private placement issuing 2,450 shares of Series I Convertible Preferred Stock (“Series I Preferred Stock”) and warrants, expiring March 10, 2009, to purchase 925,926 shares of common stock at $0.27 per share in exchange for cash $500,000 and 1,950 shares of the Company’s Series H Convertible Preferred Stock, which have been cancelled. Expenses relating to the transaction totaled $98,000 primarily relating to legal and accounting fees. In accordance with EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” the Company calculated, using the Black—Scholes method, the intrinsic value of the convertible instruments issued and determined that there was a deemed preferred dividend equal to the gross proceeds received of $500,000.  Pursuant to the terms of the financing, the Company filed a registration statement on April 7, 2006 for the common shares issuable under the Series I Preferred Stock and related warrants, which became effective on July 10, 2006.

 

Each share of Series I Preferred Stock is convertible into a number of shares of common stock determined by dividing $1,000 by the conversion price per share in effect at the time of conversion, provided that a holder of Series I Preferred Stock may at any given time convert only that number of shares of Series I Preferred Stock such that , upon conversion, the aggregate beneficial ownership of the Company’s common stock of such holder and all persons affiliated with such holder is not more than 9.99% of the Company’s common stock then outstanding. The conversion price per share is equal to 85% of the market price (the volume-weighted average price of the Company’s common stock during the five immediately preceding trading days, subject to adjustment), provided that in no event shall the conversion price exceed a ceiling price of $0.21 per share, or be less than a floor price of $0.0725 per share.

 

The Certificate of Determination for the Series I Preferred Stock provides that, if the Company  has not entered into a binding agreement to consummate a consolidation, merger, reclassification of the stock of the Company (subject to certain exceptions), or disposition of all or substantially all of the assets of the Company on or before April 30, 2006, the holders of Series I Preferred Stock may, by the vote not later than December 31, 2006 of at least two-thirds of the then-outstanding shares of Series I Preferred Stock, elect to have all of the outstanding shares of Series I Preferred Stock redeemed by the Company. In that event, the Company would be obligated to redeem the Series I Preferred Stock at an amount equal to $1,000 per share plus all declared but unpaid dividends. The Certificate of Determination further provides that, if such election were made and the Company were to lack sufficient funds available to redeem the Series I Preferred Stock in accordance with applicable law, the holders of Series I Preferred Stock as a class would be entitled to elect the smallest number of directors of the Company constituting a majority of the authorized number of directors.  As of April 30, 2006 the Company had not entered into a binding agreement to consummate a consolidation, merger, reclassification of the stock of the Company or disposition of all or substantially all of the assets of the Company.  However, the holders of the Series I Preferred Stock as of December 31, 2006 and as of the date of this filing have not notified the Company of any election to redeem the Series I Preferred Stock.  Under FAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and EITF D-98 “Classification and Measurement of Redeemable Securities” and since a binding agreement was not entered into by April 30, 2006, the Company had classified the fair value of the Series I Preferred Stock to liabilities as the Company might have been obligated to repay all the proceeds received.  Since the holders of Series I Preferred Stock have not notified the Company of a vote to redeem the Series I Preferred Stock, the Series I Preferred Stock is no longer considered redeemable and has been reclassified as equity.

 

Each holder of Series I Preferred Stock is entitled to a liquidation preference equal to the greater of (i) $1,000 per share plus declared but unpaid dividends per share and (ii) the amount such holder would be entitled to receive had such holder’s shares been converted into shares of common stock immediately prior to the distribution in accordance with the terms of the Series I Preferred Stock.  Commencing on the issuance date of the Series I Preferred Stock, the Series I Preferred Stock is entitled to receive dividends of 6.75% of the stated value of $1,000 per share per annum, only payable until the registration statement for the common stock underlying the Series I Preferred Stock is declared effective by the Securities and Exchange Commission.  That registration statement was declared effective by the Securities and Exchange Commission on July 10, 2006.

 

October 2005 Private Placement

 

On October 25, 2005, the Company completed a private placement issuing 1,950 shares of Series H Convertible Preferred Stock (“Series H Preferred Stock”) and warrants for the purchase of 925,926 common shares in exchange for cash of $500,000 and 1,450 shares of previously issued Series G Convertible Preferred Stock. (See Series G Convertible Preferred Stock below.) The common stock warrants have an exercise price of $0.27 per share and expire October 25, 2008. In connection with this transaction, the 1,450 shares of Series G Convertible Preferred Stock then outstanding were cancelled by the Company. Expenses relating to the transaction totaled $64,000 primarily relating to legal and accounting fees. In accordance with EITF 00-27 “Application of Issue No 98-5 to Certain Convertible Instruments,” the Company calculated, using the Black—Scholes method, the intrinsic value of the convertible instruments issued and determined that there was a deemed preferred dividend equal to the gross proceeds received of $500,000.  In March 2006 the Company completed a private placement exchanging all of the Series H Preferred Stock for Series I Convertible Preferred Stock.  See March 2006 Private Placement below.

 

The shares of Series H Preferred Stock issued were convertible into common stock at the conversion rate in effect at the time of conversion.  The conversion price per share of the Series H Preferred Stock was equal to 85% of the market price (the volume weighted average price of the Company’s common stock during the 5 immediately preceding trading days), provided that in no event shall the conversion price exceed a ceiling price of $0.40 per share, or be less than a floor price which varies with the aggregate gross revenues of the Company during the last four fiscal quarters for which revenues have been reported by the Company prior to such time, but which will not be lower than $0.0725 per share and not higher than $0.16 per share.  The Series H Preferred Stock accrued dividends at 6.75% of the stated value of $1,000 per share per annum.  On March 31, 2006 the Company issued 325,966 shares of common stock in payment of declared Series H Preferred Stock dividends of $44,000 based on a fair market value of $0.13 per share.

 

The terms of the October 2005 financing also provided for a second closing to have occurred no later than January 20, 2006, under which the Company would issue an additional 500 shares of Series H Preferred Stock and additional warrants for the purchase of 925,926 common shares in exchange for cash of $500,000. The obligations of the purchasers to consummate the second closing were subject to certain conditions, including that the closing price of the Company’s common stock would be $0.16 or greater for 20 consecutive trading days. This stock price condition was not satisfied and the second closing was not completed.

 

Series G Convertible Preferred Stock

 

On November 5, 2004, the Company completed a financing arrangement whereby the Company issued 2,200 shares of our Series G Convertible Preferred Stock (“Series G Preferred Stock”) along with 2,750,000 common stock warrants for gross proceeds of $2,200,000.  The Series G Preferred Stock is convertible into common stock at a price equal to 85% of the volume weighted average price of the Company’s common stock during the five trading days immediately preceding the conversion date; however, the conversion price can be no higher than $0.40 per share and no lower than $0.30 per share.  The 2,750,000 warrants have an exercise price of $0.44 per share and expire November 5, 2007.  The Company incurred $450,000 in expenses related to the transaction and issued 825,000 common stock warrants to an investment consulting firm.  The 825,000 warrants were comprised of 550,000 warrants with an exercise price of $0.40 per share which expire November 5, 2009 and 275,000 warrants which have an exercise price of $0.44 which expire on November 5, 2007. In connection with the financing, the Company recorded a beneficial conversion of $2,200,000 on the Series G Preferred Stock as a deemed dividend for the year ended September 30, 2005.  The Company recorded the value of the Series G Preferred Stock equal to the gross proceeds of $2,200,000 while the fair value of the warrants was determined to be $1,197,000 computed using a Black-Scholes model. In connection with the beneficial conversion the Company recorded a net increase of $552,000 in common stock after transaction costs.

 

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The Series G Preferred Stock is entitled to a liquidation preference equal to $1,000 per share, plus declared but unpaid dividends per share.  Commencing on the issuance date of the Series G Preferred Stock the Series G Preferred Stock was entitled to receive dividends of 5% of the stated value of $1,000 per share per annum, only payable until the registration statement for the common stock underlying the Series G Preferred Stock was declared effective by the Securities and Exchange Commission (“SEC”).  On March 22, 2005 the SEC declared the registration statement effective.  Thus the Series G Preferred Stock is no longer entitled to dividends.  During the year ended September 30, 2005, the Company issued 82,050 shares of common stock with a value of $37,000 as a dividend on the Series G Preferred Stock. The $37,000 was recorded as a cumulative preferred dividend for the year ended September 30, 2005.

 

In 2005, 750 shares of the Series G Preferred Stock with a value of $750,000 were converted into 2,428,000 shares of common stock.  In November 2005 the remaining 1,450 shares of Series G Preferred Stock were exchanged for Series H Convertible Preferred Stock as part of a private placement. 

 

Series F Convertible 5% Preferred Stock

 

On September 30, 2003, the Company issued 5,291 shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) with a stated value of $1,000 per share in consideration of the cancellation of $5,291,000 of its debt owed to Spescom Ltd. and its subsidiary (See Note 3).  The Series F Preferred Stock is convertible into the Company’s common stock at a stated conversion price of $0.45 per share, subject to certain anti-dilution provisions.  As a result of such anti-dilution provisions and the issuance of the Series I Convertible Preferred Stock, the conversion price has been adjusted to $0.39 per share.    Upon conversion of the Series F Preferred Stock at the $0.39 per share conversion price, 13,566,667 shares of the Company’s common stock is issuable based on the stated value of the Series F Preferred Stock.  In addition, upon such conversion, 3,160,912 shares of the Company’s common stock is issuable as of September 30, 2007 based on the $1,233,000 of unpaid accrued dividends and interest thereon related to the Series F Preferred Stock as of such date. Upon payment to ERP2 of the dividend declared by the Company on January 14, 2008 (as further described under “Execution of Term Sheet with ERP2 Holdings, LLC, and Associated Issuance of Common Stock Warrant and Declaration of Series F Convertible Preferred Stock Dividend Payable in Common Stock” under “Note 13—Subsequent Events” below), however, all accrued dividends and interest on the Series F Convertible Preferred Stock as of the date of such payment will be satisfied.  Conversion of the Series F Preferred Stock may occur at the option of the holder until September 30, 2008.  On that date, any outstanding Series F Preferred Stock not previously converted will be converted automatically.

 

The Series F Preferred Stock is entitled to a liquidation preference equal to $1,000 per share, plus accrued but unpaid dividends per share and interest on all accrued but unpaid dividends.  The Series F Preferred Stock is also entitled to receive dividends of 5% of the stated value of $1,000 per share per annum, payable on a quarterly basis in cash or common stock (valued on the basis of the average per share market value on the 30 trading days immediately prior to the date on which such dividend is declared by the Board of Directors).  Unpaid dividends accrue interest at the rate of 8% per annum.  As of September 30, 2007 and 2006, unpaid dividends were $1,058,000 and $794,000, respectively, and related accrued interest amounted to $175,000 and $93,000, respectively.  As part of the transaction, Spescom Ltd. and its U.K. subsidiary received certain demand and piggyback registration rights with respect to the common stock underlying the Series F Preferred Stock.  The holder of each share of preferred stock is entitled to the number of votes equal to the number of shares of common stock which the Series F Preferred Stock is entitled to upon conversion on all matters submitted to the vote of the holders of common stock, and shall vote as a class with the holders of common stock.  In a change of control, merger or sale, the Series F Preferred Stock holders would preserve their conversion rights and would be entitled to the same number and amount of shares immediately prior to such transaction. The Series F Preferred Stock was purchased by ERP2 Holdings, LLC on October 10, 2007 (see Note 12 – Subsequent Events).

 

Note 7—Shareholders’ Deficit

 

Exercise of Options to Investment Advisor

 

On May 9, 2007, the Company settled a dispute arising from claim by its former investment advisor, Cappello Capital Corp. (“Cappello”), asserting that a commission was owed in connection with the license agreement the Company signed with Aveva Solutions Limited in October 2006.  Effective May 9, 2007, the Company agreed to pay Cappello $50,000 and issued to that firm an option to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share.  On May 23, 2007, Cappello exercised the option in full on a cashless basis and the Company issued to Cappello 289,029 shares of the Company’s common stock.

Issuance of Options to Investor Relations Firm

 

During November 2005, the Company entered into a six-month engagement with an investment relations firm to develop and implement a marketing program to promote financial market and investor awareness for the Company. Under the engagement agreement, the investor relations firm was entitled to receive, every month the agreement is effective, a warrant, expiring three years from the date of issuance, to purchase 50,000 shares of the Company’s common stock  at an exercise price of $0.10 per share for a total of 300,000 shares over the six-month contract. In addition, the investment relations firm was entitled under the agreement to a one time performance warrant to purchase 500,000 shares of the Company’s common stock at $0.25 per share, which would vest if, during the term of the agreement, the volume weighted-average price of the Company’s common stock were to exceed $0.50 for five consecutive days. On March 31, 2006, the Company issued to the investor relations firm a warrant, expiring on the third anniversary of its date of issuance, for the purchase of 300,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The investor relations firm agreed to accept that warrant for 300,000 shares in lieu of all of the warrants issuable to the investor relations firm as monthly compensation during the six-month term of the agreement and in lieu of the performance warrant.  Under EITF 96-19 the fair value of the warrant to purchase 300,000 shares of common stock was determined to be $39,000 and has been expensed ratably over the six month term of the engagement agreement.

 

Warrants

 

In September 2003, warrants were issued to investors to purchase 1,008,335 shares of the Company’s common stock at an exercise price of $0.20 per share in conjunction with a private placement of accredited investors.  During 2005 warrants to purchase 90,833 shares of common stock were exercised.  The warrants were originally issued with an expiration date of August 31, 2005. All warrants were recorded based on their fair value at date of issuance determined using a Black-Scholes model.  In August 2005, the Company extended the life of the warrants one year to August 31, 2006 and increased the exercise price of warrants from $0.20 to $0.30 per share.  As a result of extending the life of the warrants and in accordance with FIN 44, the Company remeasured the value of the warrants and recorded an expense of $147,000 in the 4th quarter of fiscal 2005 and the warrants expired unexercised on August 31, 2006.

 

Warrants for services

 

On November 4, 2004, the Company issued to a public relations firm warrants to purchase 1,000,000 shares of its common stock at $0.40 per share, expiring November 3, 2007. The warrants vest and become exercisable as follows: (i) 500,000 warrants vest on the date that the average of the last sale price of the Company’s stock on the OTC Bulletin Board for the ten trading days immediately preceding such date (the “Market Price”) exceeds $0.60 per share, (ii) 250,000 warrants vest on the date that the Market Price exceeds $0.70 per share, and (iii) the remaining 250,000 warrants vest on the date that the Market Price exceeds $0.80 per share.  The fair value of the warrants, which was determined to be $30,000, was recognized ratably over the six months of the service agreement.

 

Common Stock Options 

 

In April 2007, the Company adopted its 2007 Stock Incentive Plan (the “2007 Plan”).  The 2007 Plan is administered by either the Board of Directors or a committee designated by the Board to oversee the plan.  The total number of authorized shares under the 2007 Plan is 7,500,000.  As of September 30, 2007, options to purchase 5,768,000 shares were outstanding, of which 1,692,250 were issued under the 2007 Plan and 4,075,750 were issued under the 1996 Stock Incentive Plan discussed below.   

 

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The option vesting period under the 2007 Plan is determined by the Board of Directors or a Stock Option Committee and usually provides that 25% of the options granted can be exercised immediately from the date of grant, and thereafter, those options vest and become exercisable in additional cumulative annual installments of 25% commencing on the first anniversary of the date of grant. Options granted are generally due to expire upon the sooner of ten years from date of grant, the date of termination of services for cause by the Company, twelve months after termination of services due to death or disability, 90 days after termination of services due to retirement in accordance with the Company’s retirement policy, or three months after termination of services other than for cause by the Company or due to death, disability or retirement.  The option exercise price is equal to the fair market value of the common stock on the date of grant.  Options granted to employees under the 2007 Plan may be either incentive stock options or nonqualified options. Options granted to non-employee directors under the 2007 Plan may only be nonqualified options.

 

In April 1996, the Company adopted its 1996 Stock Incentive Plan (the “1996 Plan”).  The 1996 Plan was administered by either the Board of Directors or a committee designated by the Board to oversee the plan.  On January 30, 2004 at the stockholder’s meeting a motion was approved to increase the authorized shares by 3,000,000 from 2,425,000 for the maximum number of shares of Common Stock to be issued were 5,425,000, under the 1996 Plan.  As of September 30, 2006, options to purchase 4,454,750 shares were outstanding and there were not shares available for grant as the 1996 Plan expired on March 31, 2006.

 

The option vesting period under the plan was determined by the Board of Directors or a Stock Option Committee and usually provided that 25% of the options granted were exercisable 90 days from the date of grant, and thereafter, those options vest and become exercisable in additional cumulative annual installments of 25% commencing on the first anniversary of the date of grant. Options granted are generally due to expire upon the sooner of ten years from date of grant, thirty days after termination of services other than by reason of convenience of the Company, three months after disability, or one year after the date of the option holder’s death. The option exercise price is equal to the fair market value of the common stock on the date of grant.  Options granted to employees under the 1996 Plan were either incentive stock options or nonqualified options. Only nonqualified options were granted to nonemployee directors.

 

The following table summarizes information about employee stock options outstanding:

 

						Years ended September 30,
		2007								2006								2005
		Shares				Weighted average exercise price				Shares				Weighted average exercise price				Shares				Weighted average exercise price
Outstanding at beginning of year			4,454,750			$	0.28				4,856,000			$	0.30				5,090,750			$	0.31
Options granted			1,696,000			$	0.14				2,194,000				0.12				150,000				0.23
Options exercised			(70,000	)		$	0.13				—				—				(74,000	)			0.14
Options forfeited			(312,750	)		$	0.41				(2,595,250	)			0.19				(310,750	)			0.42
Outstanding at end of year			5,768,000			$	0.24				4,454,750			$	0.28				4,856,000			$	0.30
Options exercisable at end of year			3,941,750								3,410,000								3,758,000
Weighted average fair value of
options during the year		$	0.28							$	0.32							$	0.30

The following table summarizes information about employee stock options outstanding at September 30, 2007:

 

				Options Outstanding												Options Exercisable
								Weighted
				Number				average				Weighted				Number				Weighted
				outstanding at				remaining				Average				exercisable at				average
				September 30,				contractual				exercise				September 30,				exercise
				2007				life				price				2007				price
Range of Exercise prices
$	0.110 to $0.110				80,000				8.24	years		$	0.11				40,000			$	0.11
$	0.130 to $0.130				1,037,500				8.49	years		$	0.13				519,500			$	0.13
$	0.140 to $0.140				1,937,250				9.21	years		$	0.14				669,000			$	0.14
$	0.180 to $0.180				250,000				5.54	years		$	0.18				250,000			$	0.18
$	0.210 to $0.210				1,210,000				5.87	years		$	0.21				1,210,000			$	0.21
$	0.250 to $0.350				585,500				5.27	years		$	0.33				585,500			$	0.33
$	0.370 to $1.063				585,750				2.84	years		$	0.59				585,750			$	0.59
$	1.125 to $1.125				47,000				3.18	years		$	1.13				47,000			$	1.13
$	1.313 to $1.313				30,000				2.99	years		$	1.31				30,000			$	1.31
$	1.875 to $1.875				5,000				2.65	years		$	1.88				5,000			$	1.88
$	0.110 to $1.875				5,768,000				7.07	years		$	0.24				3,941,750			$	0.28

 

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Note 8 - Income Taxes:

 

Deferred tax assets and liabilities are comprised of the following:

 

		September 30,
		2007				2006
Deferred tax assets:
Net operating loss carryforwards		$	11,118,000			$	11,727,000
Research and development costs			393,000				404,000
Depreciation and amortization			177,000				61,000
Deferred revenue			811,000				794,000
Accruals			189,000				137,000
Interest to Spescom Ltd.			161,000				-
Credits			-				274,000
Other			16,000				1,000
Total deferred tax assets			12,865,000				13,398,000
Less valuation allowance			(12,865,000	)			(13,398,000	)
Net deferred tax assets		$	—			$	—

 

The Company has recorded a valuation allowance amounting to the entire net deferred tax asset balance due to its lack of a history of earnings, possible limitations on the use of carryforwards, and the expiration of certain of the net operating loss carryforwards (“NOL”) which gives rise to uncertainty as to whether the net deferred tax asset is realizable.   The valuation allowance decreased by $533,000 during the year ended September 30, 2007.  Internal Revenue Code Section 382 and similar California rules place a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership).

 

As a result of these provisions, utilization of the NOL may be limited.  There were no significant differences from the Company’s total provision for income taxes as compared to applying the statutory foreign and U.S. federal income tax rates for the years ended September 30, 2007, 2006 and 2005.

 

The Company has NOL carryforwards of $31,442,000 and $4,833,000 for federal and state tax purposes, respectively, which expire over the years 2008 through 2025.   Effective September 11, 2002, pursuant to California revenue and tax code section 24416.3, no net operating loss deduction would be allowed for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.  For any suspended losses, the carryover period would be extended by one year for losses incurred in tax year beginning on or after January 1, 2002, and before January 1, 2003; and by two years for losses incurred in taxable years beginning before January 1, 2002

 

On October 10, 2007 Spescom Ltd. sold all of its equity interest in the Company resulting in an ownership change. Consequently, future utilization of the NOL carryforwards is estimated to be limited on an annual basis to approximately $550,000.  See Note 13-Subsequent Events.

 

Note 9—Segment and Geographic Information

 

The Company has one business segment, which consists of the development and sale of a suite of integrated document, configuration and records management software product.

 

Revenues for the years ended September 30, 2007, 2006 and 2005, by customer location are as follows:

		2007				2006				2005
United States		$	3,738,000			$	4,521,000			$	2,960,000
Europe, primarily United Kingdom			5,087,000				2,319,000				2,583,000
Other International			149,000				166,000				282,000
		$	8,974,000			$	7,006,000			$	5,825,000

 

Information by geographic location for the years ended September 30, 2007, 2006 and 2005, are as follows:

 

										Corporate
		United				Europe and				Research and
		States				other				Development				Consolidated
2007
Revenues		$	6,229,000			$	2,745,000			$	—			$	8,974,000
Operating income			1,758,000				915,000				(1,152,000	)			1,521,000
Identifiable assets			1,499,000				563,000				—				2,062,000
2006
Revenues		$	4,687,000			$	2,319,000			$	—			$	7,006,000
Operating income (loss)			(17,000	)			297,000				(1,058,000	)			(778,000	)
Identifiable assets			1,440,000				283,000				—				1,723,000
2005
Revenues		$	3,162,000			$	2,663,000			$	—			$	5,825,000
Operating income (loss)			(1,869,000	)			(537,000	)			(852,000	)			(3,258,000	)
Identifiable assets			1,300,000				345,000				—				1,645,000

 

A majority of the Europe and other revenues and operating income (loss) and all of the identifiable assets are attributable to the Company’s subsidiary in the United Kingdom. The Europe and other segment includes revenues from Aveva Solutions Limited and Network Rail that totaled 25% and 12%, respectively of the Company’s consolidated revenues for the year ended September 30, 2007.  Network Rail revenues totaled 8% and 16% of the Company’s consolidated revenues for the years ended September 30, 2006 and 2005, respectively.  The United States segment includes revenues from Constellation Energy Group that totaled 7%, 13% and 4% of the Company’s consolidated revenues for the years ended September 30, 2007, 2006 and 2005, respectively.  Research and development is performed both in the United States and Europe for the benefit of the entire Company and has not been separately allocated to geographic regions.

 

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Note 10—Long Term Obligations and Commitments

 

The Company leases equipment and office space under non-cancelable operating and capital leases with terms through September 2012.  Annual future minimum payments under capital and operating leases as of September 30, 2007 are as follows:

 

		Operating				Capital
		Leases				Leases
2008		$	253,000			$	40,000
2009			257,000				19,000
2010			264,000				18,000
2011			215,000				18,000
Thereafter			143,000				15,000
Total minimum payments		$	1,132,000				110,000
Less amount representing interest							(23,000	)
Present value of future minimum payments							87,000
Less current portion							(32,000	)
Long-term portion						$	55,000

 

Rent expense for the Company’s principal office for the years ended September 30, 2007, 2006 and 2005 was  $216,000, $231,000 and $232,000, respectively.  Cost of equipment under capital leases at September 30, 2007 and 2006 was $178,000 and $148,000, respectively, with accumulated depreciation of $80,000 and $79,000, respectively.  Payments for equipment under capital leases, including interest for the years ended September 30, 2007 and 2006 were $49,000 and $50,000, respectively. 

 

Note 11—Contingencies

 

The Company’s contingencies included the usual obligations of a software company and may include from time to time in litigation arising in the normal course of business. Management believes that any liability with respect to such matters or routine litigation if any, individually or in the aggregate, is not likely to be material to the Company’s consolidated financial position or results of operations.

 

Note 12—Quarterly Results of Operations (Unaudited)

 

						Fiscal 2007
						Three Months Ended
		December 31,				March 31,				June 30,				September 30,
Revenues		$	1,727,000			$	3,781,000			$	1,764,000			$	1,702,000
Gross profit		$	1,098,000			$	3,049,000			$	1,129,000			$	1,052,000
Net income (loss)		$	(51,000	)		$	1,452,000			$	12,000			$	(151,000	)
Deemed preferred dividends		$	-			$	-			$	-			$	-
Cumulative preferred dividends		$	(66,000	)		$	(66,000	)		$	(66,000	)		$	(66,000	)
Net income (loss) available to common shareholders		$	(117,000	)		$	1,386,000			$	(54,000	)		$	(217,000	)
Basic net income (loss) per common share		$	0.00			$	0.04			$	0.00			$	(0.01	)
Shares used in computing basic
net income (loss) per common share			37,144,000				37,144,000				37,504,000				37,504,000
Diluted net income (loss) per common share		$	0.00			$	0.02			$	0.00			$	(0.01	)
Shares used in computing diluted net
income (loss) per common share			37,144,000				87,213,000				37,504,000				37,504,000
						Fiscal 2006
						Three Months Ended
		December 31,				March 31,				June 30,				September 30,
Revenues		$	1,832,000			$	2,060,000			$	1,533,000			$	1,581,000
Gross profit		$	1,170,000			$	1,267,000			$	913,000			$	962,000
Net income (loss)		$	(179,000	)		$	(102,000	)		$	(442,000	)		$	(299,000	)
Deemed preferred dividends		$	(500,000	)		$	(500,000	)		$	-			$	-
Cumulative preferred dividends		$	(88,000	)		$	(98,000	)		$	(97,000	)		$	(71,000	)
Net income (loss) available to common shareholders		$	(767,000	)		$	(700,000	)		$	(539,000	)		$	(370,000	)
Basic net income (loss) per common share		$	(0.02	)		$	(0.02	)		$	(0.01	)		$	(0.01	)
Diluted net income (loss) per common share		$	(0.02	)		$	(0.02	)		$	(0.01	)		$	(0.01	)
Shares used in computing basic and diluted net
income (loss) per common share			36,819,000				36,895,000				36,895,000				36,895,000

 

Note 13—Subsequent Events

 

Sales of Spescom Ltd. interests in the Company

 

On October 10, 2007, pursuant to a Securities Purchase Agreement (the “Agreement”), dated as of September 30, 2007, between Spescom Ltd, and its wholly owned subsidiary Spescom UK (collectively, “Spescom”), on the one hand, and ERP2 Holdings, LLC (“ERP2”), on the other hand, the parties thereto consummated the sale by Spescom to ERP2, for aggregate consideration of $2,500,000, of all shares of the capital stock held by Spescom, two demand notes payable to Spescom, and certain contract rights and other interests held by Spescom in connection with its ownership of such shares and notes (the “Transaction”).

 

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The shares of capital stock sold to ERP2 consist of 15,650,471 shares of the Company’s common stock and 5,291 shares of the Company’s Series F Preferred Stock.  Upon conversion of the Series F Preferred Stock at the $0.34 per share conversion price effect as of January 15, 2008, 15,561,765 shares of the Company’s common stock is issuable based on the stated value of the Series F Preferred Stock.  In addition, upon such conversion, shares of the Company’s common stock are issuable based on any unpaid accrued dividends and interest thereon related to the Series F Preferred Stock as of such date.  As of the date of payment to ERP2 of the dividend declared by the Company on January 14, 2008 (as further described under “Execution of Term Sheet with ERP2 Holdings, LLC, and Associated Issuance of Common Stock Warrant and Declaration of Series F Convertible Preferred Stock Dividend Payable in Common Stock” below), there will be no such unpaid accrued dividends and interest.

 

By virtue of its ownership of the shares of common stock and Series F Convertible Preferred Stock of the Company purchased in the Transaction, ERP2 is entitled, as of January 13, 2008, to 32,554,099, or 59%, of the total number of votes eligible to be cast on all matters submitted to the vote of the holders of the common stock of the Company. Accordingly, ERP2 controls 59% of the voting power of the voting securities of the Company and is entitled to elect a majority of the board of directors of the Company (the “Board”).

 

Each of the demand notes sold to ERP2 in the Transaction bears interest at the rate of 10% per annum and is collateralized by a security interest in respect of all of the Company’s assets.  As of September 30, 2007, the balance owed on the notes including interest was $676,000.

 

The contract rights sold to ERP2 in the Transaction include the rights of Spescom Ltd. under the Stock Purchase Agreement, dated as of January 14, 2000, between the Company and Spescom Ltd.  By virtue of the sale to ERP2 of such rights of Spescom Ltd., the Company is obligated to include two nominees of ERP2 in management’s slate of nominees to be elected to the Board and recommend to its shareholders the election of such nominees for as long as ERP2 or any of its affiliates holds at least 33% of the 16,242,381 shares of the Company’s common stock sold to Spescom Ltd. pursuant to such agreement.

 

Extension of Demand Notes

On October 22, 2007, the Company and ERP2 Holdings, LLC (“ERP2”), entered into a letter agreement by which ERP2 agreed to forbear from seeking repayment of two demand notes payable to it prior to December 21, 2007 and the Company, in exchange, agreed to (i) pay a forbearance fee of $25,000 to ERP2 or its designees not later than October 24, 2007 and (ii) reimburse ERP2 for expenses, including legal fees, incurred by it in connection with a due diligence process to be commenced immediately in an amount up to $25,000.

 

Execution of Term Sheet with ERP2 Holdings, LLC, and Associated Issuance of Common Stock Warrant and Declaration of Series F Convertible Preferred Stock Dividend Payable in Common Stock

 

On January 14, 2008, the Company entered into a term sheet (the “Term Sheet”) for a financing transaction with ERP2 Holdings, LLC (“ERP2”), and in consideration for ERP2’s execution of the Term Sheet, the Company issued to ERP2 a warrant for the purchase of shares of the Company’s common stock.  In addition, in accordance with the term sheet, the board of directors of the Company declared on such date a dividend, payable to ERP2 in shares of common stock, on the shares of the Company’s Series F Convertible Preferred Stock held by ERP2.

 

The Term Sheet provides, among other things, for the concurrent consummation (the “ERP2 Closing”) of the following transactions: (i) the extension of the maturity dates of the Company’s existing secured demand notes payable to ERP2 dated March 15, 2002 and April 19, 2002, under which the aggregate amount payable by the Company including interest, as of November 30, 2007 was $687,000 (the “Old Notes”), to the date that is two years from the date of the ERP2 Closing; (ii) the agreement of ERP2 not to call such demand notes following an event of default, prior to September 30, 2008; and (iii) the issuance to the Company of additional secured promissory notes (the “New Notes”), which notes will be in the aggregate principal amount of $1,500,000 and will have a maturity period of two years from the date of the ERP2 Closing Date.  Disbursement of $300,000 of such aggregate principal amount is subject to delivery at the ERP2 Closing of definitive transaction documents pursuant to the term sheet.  Disbursement of the remaining $1,200,000 of such amount is subject to completion of all actions required to be completed by the Company in order to effectuate a 1000-to-1 reverse split of the Company’s common stock and the deregistration of the Company’s common stock under the Securities Exchange Act of 1934 (the “Borrower Actions”).  The interest rate for the extended Old Notes and the New Notes will be 10% per annum (provided that, upon an event of default, the interest rate will increase to 13% per annum).  The Old Notes and New Notes will be subject to customary events of default, including any failure of the Company to complete the Borrower Actions by April 30, 2008.  In addition, the Term Sheet provides for customary affirmative and negative covenants, including a quarterly EBITDA covenant.

 

Upon execution of the Term Sheet, the Company’s issued to ERP2 a warrant exercisable for 17,175,971 shares of Common Stock, which warrant has a per share exercise price of $0.08 and a 10-year term and contains certain “cashless exercise” and anti-dilution provisions.  The term sheet provides that, upon the above-referenced $1,200,000 disbursement, the Company will issue to ERP2 warrants for the purchase of the number of shares of common stock equal to the greater of (i) 26,735,508 shares of common stock and (ii) 20% of the fully diluted outstanding common stock as of the issuance date.  Such warrants will have a per share exercise price of $0.08 and a 10-year term, and contain customary “cashless exercise” and anti-dilution provisions.

 

Under the Term Sheet, so long as the New Notes or the Old Notes are outstanding, the Company will procure management consulting, strategic and financial advisory services from ERP2, the aggregate cost of which will not exceed $60,000 in any quarter.  The Term Sheet provides for the payment by the Company to ERP2 of all reasonable fees and expenses of ERP2 in connection with the provision of the New Note and the extension of the Old Notes, in addition to a $75,000 closing fee.  Such closing fee includes all fees and expenses that the Company is required to reimburse to ERP2 pursuant to the letter agreement between the Company and ERP2 dated October 22, 2007.

 

Upon execution of the Term Sheet, the Company declared a dividend payable to ERP2 in the amount of 20,827,268 shares of common stock, in satisfaction of the entire amount of accrued and unpaid dividends (together with interest) on the shares of the Company’s Series F Convertible Preferred Stock held by ERP2.  Upon payment of such dividend, ERP2, by virtue of its ownership of common stock and Series F Convertible Preferred Stock, will be entitled to 50,044,406 or 69% of the total number of votes eligible to be cast on all matters submitted to the vote of the holders common stock.

 

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES.

 

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2007 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, we have concluded that as of September 30, 2007, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the fourth quarter of fiscal 2007, there were no changes in the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

ITEM 9B.  OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information in the Proxy Statement for the 2008 Annual Meeting of Stockholders set forth under the captions “Directors and Executive Officers” is incorporated herein by reference.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

The information in the Proxy Statement for the 2008 Annual Meeting of Stockholders set forth under the captions “Executive Officer Compensation” is incorporated herein by reference.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of the Proxy Statement for the 2008 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information set forth under the caption “Certain Relationships and Related Transactions” of the Proxy Statement for the 2008 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information set forth under the caption “Principal Accountant Fees and Services” of the Proxy Statement for the 2008 Annual Meeting of Stockholders is incorporated herein by reference.

 

 

PART IV

 

ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES

 

(a)                                 Financial Statements, Schedules, and Exhibits

 

(1)                                 Financial Statements:

 

Consolidated Balance Sheets as of September 30, 2007 and 2006	25
Consolidated Statements of Operations for the years ended September 30, 2007, 2006 and 2005.	26
Consolidated Statement of Changes In Shareholders’ Deficit for the year ended September 30, 2007, 2006 and 2005.	27
Consolidated Statements of Cash Flows for the years ended September 30, 2007, 2006 and 2005.	28
Notes to the Consolidated Financial Statements	29

 

(2)                                 Financial Statement Schedule

 

 

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

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(3)                                 Exhibits

 

3.1		Restated Articles of Incorporation of Enterprise Informatics Inc. (incorporated by reference to Exhibit 3.1 to the Form 10-Q filed on May 15, 2007).
3.2		Registrant’s Bylaws, as amended (incorporated by reference from previous filings with the Securities and Exchange Commission).
4.1		Specimen certificate of Common Stock (incorporated by reference from previous filings with the Securities and Exchange Commission).
4.2		Certificate of Determination of Series F Convertible Preferred Stock of Altris Software, Inc., dated September 29, 2003 (incorporated by reference to Exhibit 99.3 to the Form 8-K filed on October 10, 2003).
4.3		Certificate of Determination of Series I Convertible Preferred Stock of Spescom Software Inc., dated March 9, 2006 (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on March 16, 2006).
4.4		Registration Rights Agreement by and among Altris Software, Inc. and certain shareholders, dated August 31, 2003 (incorporated by reference to Exhibit 99.3 to the Form 8-K filed on October 1, 2003).
4.5		Registration Rights Agreement by and among Altris Software, Inc., Spescom Limited, and Spescom Ltd., dated September 30, 2003 (incorporated by reference to Exhibit 99.4 to the Form 8-K filed on October 10, 2003).
4.6		Registration Rights Agreement by and among the Company, Monarch Pointe Fund, Ltd. and Mercator Advisory Group, LLC, dated November 5, 2004 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on November 12, 2004).
4.7		Registration Rights Agreement by and among the Company, Monarch Pointe Fund, Ltd. and M.A.G. Capital, LLC, dated October 25, 2005 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on October 31, 2005).
4.8		Registration Rights Agreement by and among the Company, Monarch Pointe Fund, Ltd., Mercator Momentum Fund III, L.P. and M.A.G. Capital, LLC, dated March 10, 2006 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on March 16, 2006).
4.9		Warrant to Purchase 550,000 shares of Common Stock of Spescom Software Inc. issued to Cappello Capital Corp (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 28, 2005).

 

4.10		Warrant to Purchase Common Stock issued to M.A.G. Capital, LLC, dated October 25, 2005 (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on October 31, 2005).
4.11		Warrant to Purchase Common Stock issued to Monarch Pointe Fund, Ltd., dated October 25, 2005 (incorporated by reference to Exhibit 10.5 to the Form 8-K filed on October 31, 2005).
4.12		Warrant to Purchase Common Stock issued to M.A.G. Capital, LLC, dated March 10, 2006. (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on March 16, 2006).
4.13		Warrant to Purchase Common Stock issued to Monarch Pointe Fund, Ltd., dated March 10, 2006 (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on March 16, 2006).
4.14		Warrant to Purchase Common Stock issued to Mercator Momentum Fund III, L.P., dated March 10, 2006 (incorporated by reference to Exhibit 10.5 to the Form 8-K filed on March 16, 2006).
4.15		Warrant to Purchase Common Stock issued to Liolios Group, Inc., dated March 31, 2006 (incorporated by reference to Exhibit 4.22 to the Form S-1 filed on April 7, 2006).
4.16		Warrant to Purchase Common Stock issued to ERP2 Holdings, LLC, dated January 14, 2008.
10.1		10% promissory note due upon demand in principal amount of $400,000 issued by Altris Software, Inc. to Spescom Limited, a United Kingdom corporation, on March 15, 2002 (incorporated by reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002).
10.2		10.0% promissory note due upon demand in principal amount of $500,000 issued by Altris Software, Inc. to Spescom Limited, a United Kingdom corporation, on April 19, 2002 (incorporated by reference to Exhibit 10.34 to the Form 10-Q filed on August 14, 2002).
10.3		Security Agreement between Altris Software, Inc. and Spescom Limited, a United Kingdom corporation, and Spescom Limited, a South African corporation, dated February 15, 2002 (incorporated by reference to Exhibit 10.30 to the Form 10-Q filed on May 15, 2002).
10.4		Security Agreement dated March 15, 2002 between Altris Software, Inc., a California corporation, and Spescom Limited, a United Kingdom corporation (incorporated by reference to Exhibit 10.32 to the Form 10-Q filed on May 15, 2002).
10.5		Pledge Agreement dated March 15, 2002 by and between Altris Software, Inc., a California corporation, Spescom Limited, a United Kingdom corporation, and Solomon Ward Seidenwurm & Smith, LLP (incorporated by reference to Exhibit 10.33 to the Form 10-Q filed on May 15, 2002).
10.6		Debt Conversion Agreement by and between Altris Software, Inc., Spescom Limited, and Spescom Ltd., dated September 30, 2003 (incorporated by reference to Exhibit 99.2 to the Form 8-K filed on October 10, 2003).
10.7		Stock Purchase Agreement, dated January, 2000, by and between Altris, Inc. and Spescom Limited (incorporated by reference to Annex A to the Schedule 14A filed on March 13, 2000).
10.8		Subscription Agreement by and among the Company, Monarch Pointe Fund, Ltd. and Mercator Advisory Group, LLC, dated November 5, 2004 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on November 12, 2004).
10.9		Subscription Agreement by and among the Company, Monarch Pointe Fund, Ltd. and M.A.G. Capital, LLC, dated October 25, 2005 (incorporated by reference to Exhibits 10.1 to the Form 8-K filed on October 31, 2005).
10.10		Subscription Agreement by and among the Company, Monarch Pointe Fund, Ltd., Mercator Momentum Fund III, L.P. and M.A.G. Capital, LLC, dated March 10, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8 K filed on March 16, 2006).

 

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10.11		Public Relations Agreement Between Liolios Group, Inc. and the Company dated November 15, 2005 (incorporated by reference to Exhibit 4.17 to the Form 10-K filed on January 4, 2006).
10.12		Letter Amendment to Public Relations Agreement between Liolios Group, Inc. and the Company, dated March 31, 2006 (incorporated by reference to Exhibit 4.21 to the Form S-1 filed on April 7, 2006).
10.13		Source Code License between Spescom Software Inc. and Aveva Solutions Limited, dated October 2, 2006 (incorporated by reference to Exhibit 10.13 to the Form 10-K filed on December 26, 2006).
10.14*		Amended and Restated 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed on April 5, 2004).
10.15*		Form of Incentive Stock-Option Agreement, Non-Statutory Stock-Option Agreement and Restricted Stock Option Agreement under Amended and Restated 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Form 10-K filed March 31, 1997).
10.16*		2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-8 filed May 1, 2007).
10.17*		Form of Notice of Stock Option Grant under 2007 Stock Incentive Plan, including, as exhibits thereto, the associated form of Stock Option Agreement and form of Exercise Notice (incorporated by reference to Exhibit 10.2 to the Form S-8 filed May 1, 2007).
10.18		Lease between Rowlandson Properties Limited and Spescom Software Limited, dated February 10, 2006 (incorporated by reference to Exhibit 10.20 to the Form S-1 filed on April 7, 2006).
10.19		Second Addendum to Lease between Enterprise Informatics Inc. and Mesa Ridge Center, LLC, dated June 14, 2007 (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed August 14, 2007).
10.20*		Retention Agreement between the Company and John W. Low, dated April 27, 2006 (incorporated by reference to Exhibit 10.9 to the Form 10-Q filed on May 15, 2006).
10.21*		Retention Agreement between the Company and Glenn Cox, dated April 25, 2006 (incorporated by reference to Exhibit 10.10 to the Form 10-Q filed on May 15, 2006).
10.22*		Retention Agreement between the Company and Pierre DeWet, dated April 26, 2006 (incorporated by reference to Exhibit 10.11 to the Form 10-Q filed on May 15, 2006).
10.23*		Retention Agreement between the Company and Alan Kiraly, dated April 25, 2006 (incorporated by reference to Exhibit 10.12 to the Form 10-Q filed on May 15, 2006).
10.24		Letter agreement between Enterprise Informatics Inc. and ERP2 Holdings, LLC, dated October 22, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 26, 2007).
10.25		Summary of Terms between Enterprise Informatics Inc. and ERP2 Holdings, LLC, dated January 14, 2008.
21.1		Subsidiaries of the Registrant.
23.1		Consent of Singer Lewak Greenbaum & Goldstein LLP.
31.1		Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1		Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Indicates a management contract or compensatory plan or arrangement covering executive officers or directors of the Company.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San Diego, State of California, on January 15, 2008.

		Enterprise Informatics Inc.
		By:	/s/ Alan Kiraly
			Alan Kiraly Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Alan Kiraly		Director and Chief Executive Officer (Principal Executive Officer)		January 15, 2008
Alan Kiraly
/s/ John W. Low		Chief Financial Officer and Secretary (Principal Financial and Accounting		January 15, 2008
John W. Low		Officer)
/s/ Kyong K. “Steve” Lee		Director		January 15, 2008
Kyong K. “Steve” Lee
/s/ D. Ross Hamilton		Director		January 15, 2008
D. Ross Hamilton
/s/ Richard Shorten		Director		January 15, 2008
Richard Shorten
/s/ Michael Silverman		Director		January 15, 2008
Michael Silverman
/s/ Larry D. Unruh		Director		January 15, 2008
Larry D. Unruh

 

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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

 

ENTERPRISE INFORMATICS INC.

 

Column A		Column B							Column C					Column D					Column E
									Additions
Description		Balance at				Charged to				Charged to				Deductions—					Balance at
		Beginning				Costs and				Other				Describe					End of Period
		of Period				Expenses				Accounts—
										Describe
Year ended September 30, 2007
Deducted from asset accounts:
Allowance for doubtful accounts		$	9,000			$	(10,000	)	(a)					$	9,000		(b)		$	8,000
Allowance for deferred tax benefit		$	13,398,000							$(533,000		)	(c)						$	12,865,000
Year ended September 30, 2006
Deducted from asset accounts:
Allowance for doubtful accounts		$	8,000			$	1,000		(e)										$	9,000
Allowance for deferred tax benefit		$	13,543,000							$	196,000		(c)	$	(341,000	)	(d)		$	13,398,000
Year ended September 30, 2005
Deducted from asset accounts:
Allowance for doubtful accounts		$	83,000											$	(75,000	)	(b)		$	8,000
Allowance for deferred tax benefit		$	14,822,000							$	1,061,000		(c)	$	(2,340,000	)	(d)		$	13,543,000

 

(a)             Reduction in allowance for doubtful accounts due to write down of disputed account by one customer.

 

(b)             Addition (reduction) in allowance for doubtful accounts based on history of minimal bad debt.

 

(c)             Valuation allowance against benefit recorded

 

(d)             Expiration of net operating loss carryforwards.

(e)             Addition to allowance due to increase in foreign currency exchange rates.

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