SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the year ended December 31, 2002.
[_] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from________ to ________
COMMISSION FILE NUMBER: 000-26287
Axeda Systems Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2763854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21 Oxford Road
Mansfield, Massachusetts 02048
(Address of Principal Executive Offices)
--------------------------
Registrant's Telephone Number, Including Area Code: (508) 337-9200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of such common stock held by non-affiliates of the
registrant, based on the closing price of such shares on the NASDAQ National
Market was approximately $37,888,914 as of June 30, 2002. Shares of common stock
held by each executive officer and director and each person who owns 5% or more
of our outstanding common stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of registrant's common stock outstanding as of March 3,
2003 was 27,292,969.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement prepared in connection with its
2003 Annual Meeting of Stockholders, which is expected to be filed with the
Securities and Exchange Commission on or before April 30, 2003, are incorporated
by reference into Part III of this Annual Report on Form 10-K where indicated.
The table of Exhibits filed appears on page 92.
Axeda Systems Inc.
Form 10-K Annual Report
(Year Ended December 31, 2002)
Table of Contents
Part I
Page
Item 1 Business ........................................................3
Item 2 Properties .....................................................18
Item 3 Legal Proceedings ..............................................19
Item 4 Submission of Matters to a Vote of Security Holders ............20
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters .................................................... 21
Item 6 Selected Financial Data ........................................22
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................23
Item 7a Quantitative and Qualitative Disclosures about Market Risk .....45
Item 8 Financial Statements and Supplementary Data ....................46
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ....................................85
Part III
Item 10 Directors and Executive Officers of the Registrant .............86
Item 11 Executive Compensation .........................................86
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ..................86
Item 13 Certain Relationships and Related Transactions .................86
Item 14 Controls and Procedures ........................................86
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................87
Certifications ...............................................................90
1
Cautionary Statement Concerning Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. Such statements are based on current expectations of future
events that involve a number of risks and uncertainties that may cause the
actual events to differ from those discussed herein. Such factors include, but
are not limited to: our ability to become profitable; future expenses; future
results of operations; uncertainties in the market for DRM solutions and the
potential for growth in the DRM market; our ability to raise capital; the
potential for NASDAQ delisting if the trading price of our stock remains below
$1.00; declining sales of our legacy products; the current economic slowdown and
our dependence on the cyclical software industry; present and future
competition; our ability to manage technological change and respond to evolving
industry standards; our ability to manage growth and attract and retain
additional personnel; the long sales cycle for DRM solutions; our customers'
ability to implement or integrate our DRM solutions successfully and in a timely
fashion, receive expected functionality and performance, or achieve benefits
attributable to our DRM solutions; limited distribution channels; dependence on
strategic partners; the difficulty of protecting proprietary rights; the
potential for defects in products; claims for damages asserted against us; risks
from international operations; and others discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks and other factors. Accordingly,
any forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "plans," "estimates," or "intends," or the negative
of any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. All forward-looking statements, and reasons why results may differ
that are included in this report, are made as of the date of this report, and
except as required by law, we disclaim any obligations to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein or reasons why results might differ
to reflect future events or developments. References herein to "Axeda", "we,"
"our," and "us" collectively refer to Axeda Systems Inc., a Delaware
corporation, and all of its direct and indirect U.S., Israeli, Japanese,
European and Canadian subsidiaries.
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PART I
ITEM 1.
Business of Axeda
Axeda, Axeda Systems, Axeda DRM, Axeda Device Relationship Management System,
Axeda Agent, Axeda Applications, Axeda Enterprise, Axeda Software Management,
Axeda Usage, Axeda Access, Axeda Service, Axeda Device, Axeda Administration,
Axeda Supervisor, Axeda Connector, Axeda Gateway, Axeda Builder, Wizcon, Axeda
@aGlance/IT, Axeda Web@aGlance, Axeda FactorySoft OPC, Firewall-Friendly and
Access. Insight. In Real Time. are trademarks of Axeda Systems Inc. All other
trademarks are property of their respective owners.
OVERVIEW
Axeda is an enterprise software and services company providing an emerging
category of enterprise business software known as Device Relationship
Management, or DRM. Our flagship product, the Axeda DRM System, is a distributed
software solution designed to enable businesses to remotely monitor, manage and
service intelligent devices. The Axeda DRM System enables manufacturers and
service providers to use the Internet to establish and manage continuous
connections with devices deployed at their customers' facilities, allowing them
to stay in touch with their products throughout their lifecycle, tapping the
value of remote device information with new, automated e-service, operations
monitoring, and e-commerce offerings.
Axeda customers include Global 2000 original equipment manufacturers or OEMs in
the Medical Instrument, Enterprise Technology, Printer and Copier, Industrial
Machines and Building Automation industries.
COMPANY HISTORY
We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994. In April 1999, we changed our name to Divicore Inc. and then
reincorporated in Delaware as RAVISENT Technologies Inc. in June 1999. We
changed our name to Axeda Systems Inc. in January 2002.
On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.,
or eMation, a private company organized under the laws of the State of Israel.
The acquisition gave us an immediate entry into the DRM market. During 2002 our
revenues were increasingly generated from selling DRM products. Our revenues in
2001 and 2000 were substantially generated from sales from our Internet
Appliance, or IA, business, our consumer electronics, or CE, business, and our
personal computer, or PC, business.
Our IA business was involved in the development of products for the emerging
market in information appliances. This business sold IA hardware reference
designs and software technology through intellectual property licenses and
agreements with Internet service providers. This business provided us with a
number of Internet-related products, including an efficient web browser, and
several IA reference designs including a Web Pad design, Internet ready TV and
monitor designs and an Internet-ready screenphone. We sold the assets of our IA
business, excluding inventory, to Phoenix Technologies Ltd., or Phoenix, for $18
million in March of 2001.
Our CE business designed, developed, licensed and marketed software solutions
that enable digital video and audio stream management in CE devices. This
business also provided supporting hardware designs to selected customers as well
as customization services and customer support. Our CE solutions enabled
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk or DVD; direct broadcast satellite or DBS and
high-definition television or HDTV on existing CE platforms. We sold the assets
of our CE business to STMicroelectronics, NV in March 2001 for approximately
$55.6 million.
We also generated revenue from our PC business until our exit from this business
in 2002. Our PC business designed, developed, licensed and marketed software
solutions that enabled digital video and audio stream management in PC systems.
Our PC solutions enabled decoding (playback) and encoding (recording) of
multimedia formats such as DVD, DBS and HDTV on existing personal computers. We
exited the PC business pursuant to an exclusive license with Sonic IP, Inc. in
May 2002 for a $2 million license fee.
3
Our DRM, PC, CE and IA products generated the following revenues for the last
three years:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(In thousands)
--------------
Revenues:
DRM ...... .$10,876 $1,614 $ --
PC ....... 5,068 4,534 11,739
CE ....... -- 421 1,614
IA ....... 2,185 1,020 7,501
------- ------ -------
Total $18,129 $7,589 $20,854
======= ====== =======
Additional segment information for our DRM, PC, CE and IA businesses is provided
in Note 21 to the financial statements included at Item 8 herein. Asset and
revenue information about the geographic areas we operate in is included in
notes 17 and 20 to the consolidated financial statements, filed herewith at Item
8.
DRM INDUSTRY BACKGROUND AND TRENDS
Computer-based control systems are increasingly the heart of new devices,
machines or systems made today. These intelligent systems consist of hardware
and software that is used to control the operation of the device as it is
running, perform diagnostics, and enable external systems or people to input or
query data that may be generated during operation. Depending on the cost and the
complexity of the device, all of this capability may be embedded within the
device itself or portions of it may reside on external computers that perform a
supervisory control function for one or more related devices.
Intelligent devices generate valuable information as they are operating.
Initially, this information was only made available locally through custom
control interfaces on the device itself. As embedded systems and PC technology
became pervasive and inexpensive, these devices moved to "soft" interfaces where
operators worked at computer screens to monitor and control devices. These soft
interfaces could be local to the device or more recently, could be remotely
accessible via computer networks. In many markets and for many devices, this
remains the state of the art today.
eMation identified an opportunity in the late 1980s to build a business around
real-time device control and data management. eMation has built and marketed
products to address these needs in the industrial automation market for over 14
years. These products include supervisory control and data acquisition or SCADA
systems for single or multiple devices. They feature computer-based
human-machine interface, or HMI, capability for local monitoring, and offer
sophisticated features for enabling remote control, monitoring, HMI, and data
management of device data via proprietary networks or the Internet. Our
communications technology enables multiple supervisory systems or other
real-time control and data management applications to be connected over networks
to remote operators or software systems.
eMation also identified an opportunity in the late 1990s to address new business
needs within device manufacturers. Devices contain valuable information that
could be used to control and monitor not only their output, but also their
health and operation. Business could work better if these devices could
communicate and if everyone in a business could tap directly into the
information within the devices they sell and service, or the systems they use.
For example, companies could benefit if they could tell when machines are out of
raw materials or about to fail, how many times they were used in a week, how a
facility was operating, or what features were most popular in products in use by
their customers. Based on this information, companies could lower costs, operate
more efficiently, and add new sources of revenue.
With hundreds of millions of users and growing, the Internet now provides a
fundamental infrastructure for connecting people to sources of information. In
recent years the Internet has been focused on helping people exchange
information with other people. This focus is now expanding to encompass people
exchanging information with machines and machines communicating with each other
or with enterprise software applications. The growth of the Internet has
provided a ubiquitous, open, global network that can now be used in a cost
effective manner to tap into the data locked within intelligent devices.
Connectivity is now extending to devices such as medical devices, industrial
machines, fabrication equipment, utility meters, photocopiers, mobile assets,
vending machines and appliances.
AXEDA DRM SOLUTIONS
The Axeda DRM System is an enterprise software solution that leverages the
Internet to provide real-time, continuous exchange of information between remote
devices, business systems and people. It allows timely, accurate and unbiased
information to be communicated automatically, via the Internet, between remote
devices deployed at customer facilities and external service personnel or
enterprise business systems. Patent-pending Axeda technology allows intelligent
devices hidden behind customer firewalls to have secure two-way Internet-based
communication with external sales and service personnel and their enterprise
applications. This enables companies to connect directly to their deployed
products rather than relying on feedback filtered through their users.
The Axeda DRM System can be used on a stand-alone basis where, for example,
personnel in a service department use the system on a day-to-day basis to
monitor and diagnose remote devices installed at customer sites. Further, Axeda
DRM solutions can be used to feed information to existing installed enterprise
software systems. These could include enterprise resource planning, customer
relationship management or CRM, and supply chain and asset management systems.
The Axeda DRM System is our major business focus. We complement our DRM products
with professional services, training, and support offerings. We leverage our mix
of experience in embedded systems, enterprise software, and the Internet to
solve difficult problems with practical solutions. We also continue to
separately sell the Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance and
Axeda FactorySoft OPC to support our traditional industrial automation business.
4
OUR STRATEGY
Our objective is to be the leading provider of DRM solutions and services in
targeted industries. Key elements of our strategy include:
o Reducing service costs in ready markets. Axeda is focused on helping
device manufacturers in targeted industries provide better customer
service at lower cost. We intend to continue to expand our products and
services to ensure broad and successful adoption of the Axeda DRM
System in customer service operations within our target accounts.
o Reaching additional information stakeholders. Device data stored within
the Axeda DRM System is also available to additional information
stakeholders both inside and outside the company. We offer applications
that provide solutions to marketing, sales, operations and product
development departments. For example, our Axeda Usage application
enables market and sales departments to monitor how a device is
performing or how much consumable has been used during operation,
enabling proactive decisions about product development, marketing
programs, or automated upgrade or re-supply.
o DRM-enabling complementary products and solutions. Axeda is pursuing
alliances with complementary solution suppliers whose customers can
benefit from the availability of live device data within their
businesses.
o Leverage our industrial automation experience. We are linking our
traditional industrial automation products and leveraging the broad
library of connectivity software we have established to accelerate
acceptance of the Axeda DRM System within related markets. For example,
Axeda Supervisor can be used as part of a full Axeda DRM System or
independently on a stand-alone basis as per our traditional industrial
automation customers.
MARKETS
We market our DRM solutions to device OEMs, and strategic large-scale end users
in a variety of industries. We target specific industries that have significant
service costs and uptime requirements as well as complex, intelligent systems.
Our current target industries are:
o Medical Instruments
o Office and Print Production Systems
o Enterprise Technology Equipment
o Industrial Equipment
We believe these industries have the greatest current need and most appropriate
systems for our DRM Solutions. Complex, computer controlled, electro-mechanical
devices that cannot afford downtime characterize these industries. They often
use "consumables" in their operation that device manufacturers want to
automatically and remotely monitor and re-supply.
PRODUCTS AND SERVICES
The Axeda Device Relationship Management System is a distributed software system
that lets companies use the Internet to remotely monitor, manage, and service
intelligent devices deployed at their customers' sites. It consists of a three
tier architecture with Axeda Agent software deployed in or near the remote
device, an Axeda Enterprise server that centrally receives and securely manages
the information flowing to and from remote devices, and Axeda Applications that
let field service or other enterprise personnel access, analyze, process and use
the DRM device information for business purposes.
Axeda Agent software is configured to monitor specific device data, process or
filter it locally, and securely package the information for sending to and from
the device through customer firewalls. Axeda Enterprise software manages the two
way information communication with devices , collects, stores, and manages this
information and triggers actions per specified business rules. Axeda
Applications provide a family of web browser-based software solutions that use
device data and connectivity for a variety of business processes including
remote diagnostics and repair, usage tracking, access and control, and software
release management. Certain Axeda Applications control the administration and
configuration of the DRM system itself.
Axeda Applications
Axeda Applications employ web-architected interfaces for remote device
administration, application sharing, usage tracking, software management,
diagnostics and data visualization. Whether remotely calibrating a product at a
customer site, administering a remote desktop, graphing real-time data for a
device, or updating profile information in hundreds of installed products, Axeda
DRM users access all information via their standard web browsers. No special
client-side software is required. Axeda Applications currently include:
o Axeda Service provides web-based access to global summaries and
statistics of all operating devices and enables field service and
technical support representatives to drill down for information from an
individual device to access the status for problem diagnosis and
resolution. Axeda Service provides interactive real-time and historical
data as well as automatic alarm notification and analysis to enable
fast reaction to potential problems.
5
o Axeda Access extends the remote monitoring and diagnostics capability
of the Axeda DRM System to include the remote administration of
software applications, databases, desktop computers, servers and
operating systems, increasing responsiveness to customer problems and
avoiding costly on-site service calls without compromising corporate
network security. It also allows support specialists to remotely assist
operators in the correct use of the device.
o Axeda Administration and Axeda Device let companies map the complex
relationships between users and devices with tools to configure device
business rules, define device information, and create and maintain user
information. They allow organizations to provide proactive service
worldwide while ensuring that only authorized personnel have access to
sensitive device information.
o Axeda Usage provides a window into device operation and customer
behavior, enabling companies to proactively identify usage trends. The
product's flexible design lets it measure a wide variety of usage types
as appropriate to the targeted device. Its built-in intelligence
enables automatic interactions with existing enterprise applications.
For example, medical device manufacturers can measure the number of
tests performed by their instruments; service providers for printers
and copiers can track toner usage or predict remaining equipment life;
and enterprise technology makers can track system performance or disk
space utilization in data storage equipment.
o Axeda Software Management enables the efficient, secure, reliable and
cost-effective mass distribution of software modules such as
application and operating system updates, patches, documentation and
help files via Axeda patent-pending Firewall-Friendly Internet
communications technology. It also allows the rapid retrieval of key
files, such as log, data and configuration files from deployed devices.
Axeda Software Management enables users to automate complex, remote
installation and retrieval procedures by encapsulating sequences of
device and configuration instructions with the files.
Axeda Enterprise
Axeda Enterprise server software provides a secure, fault-tolerant
infrastructure for communicating and managing the information exchange between
remote devices and businesses. Axeda Enterprise software acts as a device data
center, storing and managing live and historical information in a secure
environment. Business rules drive automated device data analysis and
notification of people or initiate transactions with other enterprise business
systems such as billing, maintenance, help-desk, inventory, re-supply, ordering
and asset management. The Axeda Integrator for Siebel provides seamless
integration between Axeda Enterprise and the Siebel 7 Field Service application
from Siebel Systems Inc. The Axeda Integrator for SAP provides a similar
certified integration with the mySAP.com e-business platform. Sophisticated
security features assure data is encrypted and authenticated as it moves between
devices and users. Access controls assure only the right people can access
designated devices. An integrated reporting engine enables data to be published
and analyzed.
Intelligent Agents
Axeda Agent products at the device allow distributed monitoring, communications
and control. These software products run on or are attached to devices, allowing
local data processing and two-way, Firewall-Friendly communications with the
enterprise. By putting intelligence on devices, Axeda DRM takes advantage of
distributed processing to enable large-scale deployment of proactive device
management.
Axeda Agents are fully portable across the most popular operating systems and
are easily integrated with existing designs or serve as the basis for entirely
new products. Intelligent Agent technology is offered in a variety of forms:
embedded within the chip or control processor, in an attached gateway, or as a
full supervisory system capable of managing multiple devices or a whole
facility.
Axeda Connector provides data acquisition, local decision-making, and web user
interface for intelligent devices and systems. Axeda Gateway pools the
information from multiple devices in a local area and sends it to the Axeda
Enterprise server, providing a single interface between multiple devices and the
enterprise. Both of these agents include the functionality and extensible markup
language or XML processing needed to perform two-way Firewall-Friendly
communication between a group of local devices and the Axeda Enterprise server.
Axeda Builder provides a graphical development studio for creation, deployment
and remote administration of Axeda Connector and Axeda Gateway applications.
Axeda Supervisor builds on this core agent capability and provides local control
for complex systems of devices such as building controls or plant floors,
sending system-wide data to the Axeda Enterprise server and enabling central
control and monitoring of geographically dispersed systems. Combining both
discrete and process control with the Internet, Axeda Supervisor supplies the
software tools businesses need to build a complete automation solution. Axeda
Supervisor can be used as part of a full Axeda DRM System or independently on a
stand-alone basis as per our traditional industrial automation customers.
6
A comprehensive library of customizable drivers, industry standard protocols,
and sophisticated programs complete the connection between Axeda Agents and the
device. These can include custom device drivers, pre-built industry standard
interfaces, or multi-protocol toolkits developed by Axeda, including Axeda
@aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC.
DRM Professional Services
Axeda delivers experienced project and system integration services designed to
provide clients with DRM solutions that meet their specific business needs in
the shortest time possible. Our software developers and application engineers
have a broad range of technical and commercial e-business experience. Our
methodology begins with a detailed evaluation of the business issues surrounding
the Internet enabling of the client's products, systems and services. Other
services include installation, application and device driver development,
deployment support, migration and tuning. Axeda also provides a range of
educational and support services to assure successful 24x7 ongoing operation.
STRATEGIC ALLIANCES
We have and will continue to enter into strategic alliances with experienced
technology, systems, consulting and distribution companies carefully selected
for their expertise in systems integration, hardware, software, enterprise
applications and other critical services. Existing relationships include:
o Electronics For Imaging (EFI). In July 2002, we signed a multi-year,
exclusive agreement with EFI, a leader in software and hardware imaging
solutions for network printing, to develop and market DRM-based
products for the office and print production systems marketplace.
o Toshiba IT-Solutions Corporation, a leading provider of information
technology (IT) systems integration and customer support solutions,
entered into a reseller agreement with us in December 2002 to offer the
Axeda DRM system as part of their Total Solutions offering. Toshiba
IT-Solutions sells and supports the Axeda DRM system and provides
related implementation, system integration, and managed service
offerings to their Japanese customers in a wide range of markets
including industrial equipment, medical and scientific instruments,
power systems, building automation, traffic control, and computers and
information equipment.
o Hitachi High-Technologies Corporation (HHT). In March 2002, HHT, a
high-tech trading company and equipment maker, selected Axeda as its
partner for its new DRM managed services business. HHT licensed the
Axeda Device Relationship Management System for its Japanese
application service provider (ASP) center. HHT will offer new managed
services based on Axeda DRM to industrial companies in multiple markets
such as facilities management, various kinds of production equipment,
industrial automation and office equipment.
o Siebel Systems, Inc. We are a certified Siebel Software Partner. Siebel
is a leading e-business applications company, providing CRM solutions
to some of the world's largest companies. Our Axeda Integrator for
Siebel provides seamless integration with the Siebel 2000 and Siebel 7
Field Service application from Siebel Systems Inc. allowing devices to
automatically feed data to and start service transactions with Siebel
e-Business applications.
o SAP has certified the XML Communication Interface (CA-XML) for
integrating the Axeda DRM System with the mySAP.com(R) e-business
platform, thus extending the value of SAP(R) solutions with real-time
device information. Customers who leverage SAP's world leading
solutions will be able to benefit from automated access through Axeda
DRM to real-time information from remote devices.
o Nokia. We have developed solutions to bring together the Nokia M2M
Platform and the Axeda DRM System. Our objective is to jointly enable
businesses in multiple markets to offer automated monitoring,
management, service and re-supply of remote and mobile devices via
wireless communications and the Internet.
SALES AND MARKETING
Our sales and marketing strategy is focused on target account selling in
specific industries. The majority of our direct sales resources are targeted
toward direct sales of DRM to large OEMs in the United States, Europe, and
Japan. We apply an integrated sales and marketing strategy with target account
marketing efforts focused on media and analyst relations, product marketing, web
sites, sales tools, targeted lead generation, executive events, direct marketing
promotions and trade shows in target industries. These direct resources are
leveraged in the industrial automation market through a network of OEMs,
distributors and systems integrators who sell our traditional industrial
automation products to end users, some of which are smaller customers in remote
markets, such as those in South America, Eastern Europe, and China.
Through December 31, 2002, we received grants from the Israeli Government
through the Fund for the Encouragement of Marketing Activities, or the Marketing
Fund, in the aggregate amount of $1.2 million and paid royalties in the
aggregate amount of $0.2 million. In February 2003 we paid royalties of $0.4
million to the Marketing Fund. We are obligated to pay royalties of 4.0% of
revenues derived from sales of products developed using such grants.
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CUSTOMERS
We target our Axeda DRM solutions at OEMs that build and support intelligent
devices in industries that have significant service costs and uptime
requirements. We currently serve Global 2000 companies in the Medical
Instrument, Enterprise Technology, Office and Print Production systems,
Industrial and Building Automation industries. Our customers include Air
Liquide, Beckman Coulter, Fr. Sauter AG, Shinkawa Electric Co., Ltd., CERN,
Toshiba IT-Solutions Corporation, Varian Medical Systems, Chiron Corporation,
MAQUET, Procket Networks, Inc., Network Appliance, Inc., Abbott Laboratories,
Hitachi High-Technologies - Kasado Works and Applied Biosystems Group.
During 2002 a substantial portion of our revenues was derived from a small
number of customers. For the year ending December 31, 2002, five customers
accounted for $6.2 million or 34% of our total revenues.
RESEARCH AND DEVELOPMENT
We believe that our future success depends in large part on our ability to
enhance existing products, reduce product cost and develop new products that
maintain technological competitiveness. We believe that we must continually
enhance the performance and flexibility of our current products and successfully
introduce new products. Product development involves several functional groups
within our organization and is designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market.
For the year ended December 31, 2002 our DRM business had research and
development expenditures, excluding non-cash compensation, totaling $5.6
million. For the years ended December 31, 2001 and 2000, eMation as a
stand-alone entity had research and development expenditures, excluding non-cash
compensation, totaling $5.9 million and $6.1 million, respectively.
The majority of our DRM product line is developed at our research and
development headquarters in Mansfield. As of February 28, 2003, we employed a
total of 34 research and development personnel in our Mansfield office and 5
research and development personnel in our Israeli office.
Prior to being acquired by us in December 2001, eMation received grants in
Israel from the Office of the Chief Scientist or OCS in the aggregate amount of
$1.8 million to fund the development of our Axeda Supervisor product. We are
obligated to pay royalties of 3.0% to 3.5% of revenues derived from sales of
products funded through grants received from the OCS. We have paid royalties to
the OCS in the aggregate amount of $1.4 million. As of December 31, 2002, $0.2
million of the remaining potential $0.4 million of principal liability is
accrued in other current liabilities. The terms of the OCS grants require that
we manufacture our products that are developed with such grants in Israel. In
addition, we may not transfer the technology developed pursuant to the terms of
these grants to third parties without the prior approval of a governmental
committee.
COMPETITION
Competition in the market for DRM solutions is emerging and expected to grow
stronger. The principal competitive factors that affect our performance in the
DRM market are the following:
o our ability to effectively market and sell our products;
o our customer service and support;
o our product reputation, quality and performance; and
o the price and features of our products such as adaptability,
scalability, the ability to integrate with other products,
functionality, and ease of use.
One competitive approach to the Axeda DRM system today is from custom software
development from in-house developers within the machine and device manufacturers
that are our prime sales targets, or from system integrators doing custom
product development. These companies may choose to deploy their own information
technology personnel or utilize system integrators to write new code or rewrite
existing applications in an effort to develop their own information extraction
solutions. As a result, prospective clients may decide against purchasing and
implementing externally developed software and, instead, may develop their own
solutions similar to our DRM solutions.
A number of vertical market solution suppliers have also begun to market device
management infrastructures for use in specific industries. Today, companies such
as IBM Global Services/ILS and Brooks-PRI (semiconductor), Questra (medical and
office), Invensys (industrial), Imaging Portals (copiers), NextNine (telecom)
and Motive (enterprise technology, telecom), compete in specific market segments
that we operate in.
We also expect to see new or increased competition from several areas, including
device networking companies, providers of industrial automation products, and
e-Business platforms such as the large CRM companies.
8
We expect competition to intensify as the DRM market matures. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may have
significantly more personnel or greater financial, technical, marketing and
other resources than either our current competitors or we do. Furthermore, our
future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business.
INTELLECTUAL PROPERTY
Our success is heavily dependent upon our proprietary technology. To protect our
proprietary rights, we rely on a combination of patent, copyright, trade secret
and trademark laws. We currently have eleven patent applications pending in the
United States and five patent applications pending internationally with respect
to our DRM technology. We have registered the trademark "AXEDA" in the U.S.
Patent and Trademark Office, and have numerous corresponding trademark
registrations or applications filed for "AXEDA" in foreign jurisdictions. As a
part of our regular business processes, we generally enter into nondisclosure
agreements with employees, consultants, distributors and corporate partners, as
appropriate, and limit access to and distribution of our software, documentation
and other proprietary information. Further, our software licensing agreements
provide for protection of our intellectual property within our software.
EMPLOYEES
As of February 28, 2003 we had a total of one hundred and fifty-four (154)
employees, thirty-nine (39) of whom were engaged in research and development,
forty-three (43) in sales, seven (7) in marketing, thirty-three (33) in service
and thirty-two (32) in administration. At December 31, 2001, we had a total of
one hundred and eighty-eight (188) full-time employees, sixty-seven (67) of whom
were engaged in research and development, fifty-one (51) in sales, eleven (11)
in marketing, twenty-one (21) in service and thirty-eight (38) in
administration.
Our future performance depends in significant part upon the continued services
of our key technical, sales and senior management personnel. The loss of the
services of one or more of our key employees could harm our business. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with employees to be good.
9
RISK FACTORS
Our business is subject to a number of risks. You should carefully consider the
risks described below, in addition to the other information contained in this
Report and in our other filings with the SEC. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also affect our business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose part or all of your investment.
We have never been profitable and may never achieve profitability in the future
We had a net loss from operations of approximately $53.2 million for the year
ended December 31, 2002. To date, we have not achieved operating profitability
on an annual basis.
We have invested and continue to invest significant resources in product
development, selling and marketing, services and support and administrative
expenses. To achieve profitability, we will need to increase revenues
significantly. We cannot assure you that our revenues will grow or that we will
achieve or maintain profitability in the future.
Our future success depends upon the acceptance of our DRM solutions
Our future growth will be driven by the Axeda DRM System and related services.
We have limited experience in this market. We acquired eMation in December 2001.
eMation was founded in 1988 and historically derived its main source of revenues
from its industrial automation products. We offer the Axeda DRM System and also
continue to separately sell the Axeda Supervisor, Axeda @aGlance/IT, Axeda Web
@aGlance and Axeda FactorySoft OPC to support our traditional industrial
automation business.
Net revenues from our legacy products, which include Axeda Supervisor, Axeda
@aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, have decreased and we
expect that net revenues from these products will continue to decline in the
future as we focus our efforts on the development of the Axeda DRM System
Net revenues from eMation's legacy products, which include Axeda Supervisor,
Axeda @aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, have accounted
for a significant portion of its historical net revenues but have declined
recently. We anticipate that net revenues from our legacy products will continue
to decline in the future as we plan to continue to focus on the development of
the Axeda DRM System. We do not know if this transition in product development
will be successful. If the expected decline in net revenues attributable to our
legacy products is not offset by increases in net revenues from the Axeda DRM
System, our business will be harmed.
It may be difficult to raise needed capital in the future, which could
significantly harm our business
We may require substantial additional capital to finance our future growth and
fund our ongoing research and development activities beyond 2003. Our capital
requirements will depend on many factors, including:
o acceptance of and demand for our products;
o the costs of developing new products; and
o the extent to which we invest in new technology and research and
development projects.
Although our current business plan does not foresee the need for further
financing to fund our operations for the next year, due to risks and
uncertainties in the market place, we may need to raise additional capital.
Additionally, to the extent that the proceeds from the dispositions of our CE
and IA businesses and license of our PC business are exhausted, and if our
existing sources of cash and cash flow from operations, if any, are insufficient
to fund our activities, we may need to raise additional funds. If we issue
additional stock to raise capital, your percentage ownership in Axeda would be
reduced. Additional financing may not be available when needed and, if such
financing is available, it may not be available on terms favorable to us.
We received a letter from NASDAQ stating that if we are unable to comply with
the minimum bid price of $1.00, our common stock will be delisted
We received a letter dated January 6, 2003, from the staff of the NASDAQ Stock
Market, or NASDAQ, which notified us that the bid price for our common stock had
been below $1.00 per share for a period of thirty consecutive days. NASDAQ
advised us that we would be given a period of ninety days within which to comply
with the minimum bid price requirement in order to maintain the listing of our
common stock on the NASDAQ National Market. If we are unable to demonstrate
compliance with the minimum bid requirement for ten consecutive days on or
before April 7, 2003, NASDAQ will provide us with written notification that our
common stock will be delisted. At that time we may appeal the staff's decision
to a NASDAQ Listing Qualification Panel. In the alternative, we may apply to
transfer our securities to the NASDAQ SmallCap Market. If we submit a transfer
10
application and pay the applicable listing fees by April 7, 2003, initiation of
de-listing proceedings will be stayed pending NASDAQ's review of our transfer
application. If the transfer application is approved, we will have a 180 day
grace period ending on July 7, 2003 from meeting the NASDAQ SmallCap listing
requirements, and will be eligible for an additional 180 day grace period if we
meet the initial listing requirements for the NASDAQ SmallCap Market. We intend
to pursue all available options to meet the NASDAQ listing requirements. If our
common stock is delisted from the NASDAQ National Market, sales of our common
stock would likely be conducted on the SmallCap Market or in the
over-the-counter market. This may have a negative impact on the liquidity and
price of our common stock.
Economic conditions could adversely affect our revenue growth and ability to
forecast revenue
The revenue growth of our business depends on the overall demand for DRM
software and services. Because our sales targets are primarily major corporate
customers in the medical instruments, enterprise technology, the industrial and
building equipment, and office and print production industries, our business
depends on the overall economic conditions and the economic and business
conditions within these industries. Predictions regarding economic conditions
have a low degree of certainty, and further predicting the effects of the
changing economy is even more difficult. Customers may defer or reconsider
purchasing products if they continue to experience a lack of growth in their
business or if the general economy fails to significantly improve. A softening
of demand for computer software caused by a continued weakening of the economy,
domestically or internationally, may result in a decrease in revenues and growth
rates. In addition, the financial, political, economic and other uncertainties
following the terrorist attacks upon the United States in September 2001 led to
a further weakening of the global economy. Subsequent terrorist acts and/or the
threat of future outbreak or continued escalation of hostilities involving the
United States or other countries, including the current crises in Iraq and North
Korea, could adversely affect the growth rate of our software license and
services revenue and have an adverse effect on our business, financial condition
or results of operations.
Our historical financial information is of limited value in projecting our
future operating results or evaluating our operating history
We believe that you should not rely on the results for any period prior to the
eMation acquisition as an indication of our future performance because our
business model has changed significantly since the sales of our CE and IA assets
in the first quarter of 2001, the license of our PC technology to Sonic in May
2002, and the acquisition of eMation in December 2001.
We may not be able to compete effectively
Competition in the market for DRM solutions is emerging and expected to grow
stronger. We expect that competition will increase in the near term and that our
primary long-term competitors may not yet have entered the market. Our future
competitors may have significantly more personnel or greater financial,
technical, marketing and other resources than either our current competitors or
we do. Furthermore, our future competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements than we
can. Also, future competitors may have greater name recognition and more
extensive customer bases that they can leverage. Increased competition could
result in price reductions, fewer customer orders, reduced gross profit margins
and loss of market share, any of which could harm our business.
We may not be able to keep pace with technological advances
The process of remotely extracting and managing information from intelligent
devices will likely be characterized by rapid technological change, frequent new
product introductions and emerging industry standards. We also expect that the
rapid evolution of Internet-based applications and standards, as well as general
technology trends such as changes in or introductions of operating systems, will
require us to adapt our products to remain competitive. Our products could
become obsolete and unmarketable if we are unable to quickly adapt to new
technologies or standards.
To be successful, we will need to develop and introduce new products and product
enhancements that respond to technological changes, evolving industry standards
and other market changes and developments in a timely manner and on a
cost-effective basis. Although we plan to continue to spend substantial amounts
on research and development in the future, we cannot assure you that we will
develop new products and product enhancements successfully or that our products
will achieve broad market acceptance. Our failure to respond in a timely and
cost-effective manner to new and evolving technologies and other market changes
and developments could adversely impact our business.
Our sales cycle for DRM products is long and may be seasonal and we may rely on
large contracts from relatively few DRM customers, which may cause our operating
results to fluctuate
11
Our sales cycle is lengthy and may be subject to seasonality. Our sales
typically involve significant capital investment decisions by prospective
customers, as well as a significant amount of time to educate them as to the
benefits of our products. As a result, before purchasing our products, companies
spend a substantial amount of time performing internal reviews and obtaining
capital expenditure approvals. It may take up to nine to twelve months or more
from the time we first contact a prospective customer before receiving an
initial order. The length of our sales cycle may also depend on a number of
additional factors, including the following:
o the complexities of the problems our solutions address;
o the breadth of the solution required by the customer, including the
technical, organizational and geographic scope of the license;
o the sales channel through which the solution is sold;
o the economic conditions in the United States and abroad;
o increased economic uncertainty and political instability world-wide
following the terrorist attacks which began in the United States on
September 11, 2001 and the threat of future outbreak or continued
escalation of hostilities involving the United States or other
countries, including the current crises in Iraq and North Korea; and
o any other delays arising from factors beyond our control.
Furthermore, our software license revenues may result from a relatively small
number of sales, some of which generate disproportionately large revenues.
Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. Because we typically recognize a
substantial portion of our software revenue in the last month of a quarter, any
delay in the license of our products could cause significant variations in our
revenue from quarter to quarter. These fluctuations could cause our operating
results to suffer in some future periods because our operating expenses are
relatively fixed over the short term and we devote significant time and
resources to prospective clients.
A variation in the conversion of our revenue pipeline to contracts could
adversely affect our revenues and ability to forecast operations
Our revenue pipeline estimates may not consistently correlate to actual revenues
in a particular quarter or over a longer period of time. A slowdown in the
economy, domestically and internationally, has caused and may continue to cause
customer purchasing decisions to be delayed, reduced in amount or canceled, all
of which have reduced and could continue to reduce the rate of conversion of the
pipeline into contracts. A variation in the pipeline or in the conversion of the
pipeline into contracts could cause us to plan or budget inaccurately and
thereby could adversely affect our business, financial condition or results of
operations.
Implementation of our products can be difficult, time-consuming and expensive
and customers may be unable to implement our products successfully or otherwise
achieve the benefits attributable to our products
Our customers often desire to integrate our DRM solutions with their existing
computer systems and software programs. This can be complex, time-consuming and
expensive, and may cause delays in the deployment of our products. As a result,
some customers may have difficulty or be unable to implement our products
successfully or otherwise achieve the benefits attributable to our products.
Delayed or ineffective implementation of our software and services may limit our
ability to expand our revenues and may result in customer dissatisfaction, harm
to our reputation and cause issues relating to the collection of accounts
receivable.
We are dependent upon our key management for our future success, and few of our
key personnel are obligated to stay with us
Our success depends on the efforts and abilities of our senior management and
certain other key personnel. Many of our key employees are employed at will. Our
business could be harmed if any of these or other key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement.
Our future growth will be limited if we are unable to expand our indirect
distribution sales channels
We currently have relationships with only a limited number of indirect
distribution channels, consisting of relationships with independent software
vendors, software distributors and system integrators. Nevertheless, we have
derived, and we anticipate that we will continue to derive, a significant
portion of our revenues from these relationships.
Our future growth will be limited if:
o we fail to work effectively with indirect distribution channels;
o we fail to increase the number of indirect distribution channels with
which we have relationships;
o the business of one or more of our indirect distribution channels
fails; or
o there is a decrease in the willingness and ability of our indirect
distribution channels to devote sufficient resources and efforts to
marketing and supporting our products.
12
If any of these circumstances occurs, we will have to devote substantially more
resources to the sales, marketing, distribution, implementation and support of
our products than we otherwise would, and our own efforts may not be as
effective as those of our indirect distribution channels.
Increased sales through indirect channels may adversely affect our operating
performance
Even if our marketing efforts through indirect channels are successful and
result in increased sales, our average selling prices and operating margins
could be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
We depend on our strategic partners and other third parties for sales and
implementation of our products. If we fail to derive benefits from our existing
and future strategic relationships, our business will suffer
From time to time, we have collaborated with other companies in areas such as
marketing, distribution or implementation. Maintaining these and other
relationships is a meaningful part of our business strategy. However, some of
our current and potential strategic partners are either actual or potential
competitors, which may impair the viability of these relationships. In addition,
some of our relationships have failed to meet expectations and may fail to meet
expectations in the future. A failure by us to maintain existing strategic
relationships or enter into successful new strategic relationships in the future
could seriously harm our business, operating results and financial condition.
We rely upon technology licensed from third parties, and if we do not maintain
these license arrangements, we may experience delays until replacement
technology is licensed and integrated
We license technology that is used in our products from third parties under
agreements and we may not be able to maintain these license arrangements. This
technology may not continue to be available on commercially reasonable terms, if
at all, and would be difficult to replace. The loss of any of these technology
licenses could result in delays until replacement technology is licensed and
integrated. In addition, any defects in this licensed technology could prevent
the implementation or impair the functionality of our products, delay new
product introductions or injure our reputation. If we are required to enter into
license agreements with third parties for replacement technology, we could be
subject to higher royalty payments.
Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed
Our ability to compete depends substantially upon our internally developed
technology. We have a program for securing and protecting rights in patentable
inventions, trademarks, trade secrets and copyrightable materials. However,
there can be no assurance that we have taken or will take all necessary steps to
protect our intellectual property rights. If we are not successful in protecting
our intellectual property, our business could be substantially harmed.
We regard the protection of patentable inventions as important to our business.
We currently have eleven U. S. patent applications pending relating to our DRM
business and five patent applications pending internationally. It is possible
that our pending patent applications may not result in the issuance of patents
or that our patents may not be broad enough to protect our proprietary rights.
We rely on a combination of laws, such as copyright, trademark and trade secret
laws, and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. Despite any
precautions which we have taken:
o laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o other companies may claim common law or other trademark rights based
upon state or foreign law which precede our registration or use of such
marks;
o current federal laws that prohibit software copying provide only
limited protection from software pirates, and effective trademark,
copyright and trade secret protection may be unavailable or limited in
certain foreign countries;
o policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we are unable to determine the extent
to which piracy of our products and trademarks may occur, particularly
overseas;
o certain of our products are licensed under shrink-wrap license
agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions; and
o tamper-resistant copy protection codes and dongles may not be
successful in preventing unauthorized use of our software.
13
The laws of other countries in which we market our products might offer little
or no effective protection of our proprietary technology. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology
could enable third parties to benefit from our technology without paying us for
it, which could significantly harm our business.
Any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenue. Infringement claims
and lawsuits would likely be expensive to resolve and would require management's
time and resources and, therefore, could harm our business.
We may be subject to product returns, product liability claims and reduced sales
because of defects in our products
Our products are very complex and may contain undetected errors that could harm
our reputation, result in product liability or decrease market acceptance of our
products. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Our products are integrated with
our customers' networks and software applications. Errors may also arise as a
result of defects in the products and systems into which our products are
incorporated. We are unable to test our products in each of the applications in
which they are designed to work. It is possible that defects could cause our
customers to experience device or application failures. We have an extensive
quality assurance process in place and procedures to handle customer complaints
and deliver bug fixes. Despite our quality assurance process and that of our
customers, defects and errors may be found in new products or in new versions or
enhancements of existing products after commercial shipment has begun. We may be
required to devote significant financial resources and personnel to correct any
defects. Known or unknown errors or defects that affect the operation of our
products could result in the following, any of which could harm our business:
o delay or loss of revenues;
o although we have not lost a customer due to defects, it is foreseeable
that a customer could cancel a contract due to defects;
o diversion of development resources;
o increased product development costs;
o damage to our reputation;
o delay or diminish market acceptance of our products;
o increased service and warranty costs; and
o litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, our product
liability insurance may not be adequate to cover our losses in the event of a
product liability claim resulting from defects in our products and may not be
available to us in the future.
Substantial litigation regarding intellectual property rights exists in our
industry
There is a risk that third-parties, including current and potential competitors
and current developers of our intellectual property, will claim that our
products, or our customers' products, infringe on their intellectual property
rights or that we have misappropriated their intellectual property. Software,
business processes and other property rights in our industry might be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Other parties might currently have, or might eventually be
issued, patents that infringe on the proprietary rights we use. Any of these
third parties might make a claim of infringement against us.
We may be required to pay substantial damages and may be restricted or
prohibited from selling our products if it is proven that we violate the
intellectual property rights of others. The defense of infringement claims and
lawsuits, regardless of their outcome, would likely be expensive to resolve and
could require a significant portion of management's time. We cannot assume that
we will prevail in intellectual property disputes regarding infringement,
misappropriation or other disputes. Litigation in which we are accused of
infringement or misappropriation might cause a delay in the introduction of new
products, require us to develop non-infringing technology, require us to enter
into royalty or license agreements, which might not be available on acceptable
terms, or at all, or require us to pay substantial damages, including triple
damages if we are held to have willfully infringed a third party's intellectual
property. If a successful claim of infringement was made against us and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
14
In addition, rather than litigating an infringement matter, we may determine
that it is in our best interests to settle the matter. The terms of a settlement
may include the payment of damages and our agreement to license technology in
exchange for a license fee and ongoing royalties. These fees may be substantial.
If we are forced to take any of the actions described above, defend against any
claims from third parties or pay any license fees or damages, our business could
be harmed.
We have received notices of claims related to our PC products regarding the
alleged infringement of third parties' intellectual property rights that may
cause us to pay damages
Some third parties claim to hold patents covering various aspects of DTV, HDTV
and DVD technology incorporated into our former and our former customers'
digital media products and have claimed that various aspects of DTV, HDTV and
DVD technology incorporated into our and our customers' digital media products
infringe upon patents held by them, including the following:
o A group of companies has formed a consortium known as MPEG-LA to
enforce the proprietary rights of other holders of patents covering
essential aspects of MPEG-2 technology that were incorporated into our
former products.
o Another group of companies has formed a consortium known as DVD6C
(formerly DVD Patent License Program) to enforce the proprietary rights
of other holders of patents covering essential aspects of DVD
technology that were incorporated into our former products.
o Another consortium of companies, commonly known as 3C, notified a
number of DVD product manufacturers that the members of the consortium
hold patents that are essential to DVD technology, and have requested
that such companies pay license royalties for the use of the technology
covered by the 3C patents.
If MPEG LA, DVD6C, 3C, or any other third party proves that our former digital
media products infringe their proprietary rights, we may be required to pay
substantial damages for such past infringement.
We may also be liable to some of our former customers for damages that they
incur in connection with intellectual property claims. Some of our license
agreements with former customers contain warranties of non-infringement and/or
commitments to indemnify our customers against liability arising from
infringement of third-party intellectual property, which may include third-party
intellectual property such as the patents held by members of MPEG LA, DVD6C, and
others. These commitments may require us to indemnify or pay damages to our
customers for all or a portion of any license fees or other damages, including
attorneys' fees, they are required to pay or agree to pay these or other third
parties. We have received notices of up to an aggregate of five million dollars
asserting rights under the indemnification provisions and warranty provisions of
our license agreements from several former digital media products customers. We
may be required to pay substantial damages with respect to such indemnification
assertions.
Stock-based compensation will negatively affect our operating results
We have recorded deferred compensation in connection with the grant of stock
options to employees where the option exercise price is less than the estimated
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred stock compensation, net of
forfeitures, within stockholders' equity of $2.2 million at December 31, 2002,
which is being amortized over the vesting period of the related stock options,
ranging from one to four years. A balance of $0.6 million remains at December
31, 2002 and will be amortized as follows: $0.5 million in 2003; and $0.1
million in 2004.
The amount of stock-based compensation in future periods will increase if we
grant stock options where the exercise price is less than the quoted market
price of the underlying shares or if we modify the terms of existing stock
options. The amount of stock-based compensation amortization in future periods
could decrease if options for which accrued, but unvested deferred compensation
has been recorded, are forfeited.
Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability
We conduct business in a number of different countries. We sell products in
several countries outside the United States, including France, Germany, Holland,
Japan, the United Kingdom, Israel and other countries in Asia and Latin America.
Our operations outside the United States include facilities located in France,
Japan and Holland. For the year ended December 31, 2002, we derived
approximately 46% of our revenues from sales to foreign companies. We anticipate
that revenues from international operations will continue to represent a
significant portion of our revenues. As a result, we are subject to risks
associated with selling and operating in foreign countries. For example, some of
our contracts with foreign customers are denominated in foreign currencies. We
do not currently hedge against the risk of such transactions and as a result, we
face a risk of loss related to possible fluctuations in currency exchange rates.
Our geographic diversity requires significant management attention and financial
resources. Significant management attention and financial resources are needed
to develop our international sales, support and distribution channels. We may
not be able to maintain international market demand for our products. Our
business could be adversely impacted if we are unable to successfully launch our
DRM products into our international operations.
15
Additional risks related to selling and operating in foreign countries include,
among others:
o legal uncertainty regarding liability;
o language barriers in business discussions;
o cultural differences in the negotiation of contracts and conflict
resolution;
o time zone differences;
o reduced protection for intellectual property rights in some countries;
o differing labor regulations;
o tariffs, trade barriers and other regulatory barriers;
o problems in collecting accounts receivable;
o political and economic instability;
o changes in diplomatic and trade relationships;
o seasonal reductions in business activity;
o potentially adverse tax consequences;
o complexity and unexpected changes in local laws and regulations;
o greater difficulty in staffing and managing foreign operations; and
o increased financial accounting and reporting burdens and complexities.
We are subject to conditions attached to governmental grants we have received in
Israel
Prior to being acquired by us in December 2001, eMation received grants in
Israel from the OCS in the aggregate amount of $1.8 million to fund the
development of our Axeda Supervisor product. We have paid royalties to the OCS
in the aggregate amount of $1.4 million. As of December 31, 2002, $0.2 million
of the remaining potential $0.4 million of principal liability is accrued in
other current liabilities. We are obligated to pay royalties of 3.0% to 3.5% of
revenues derived from sales of products funded through grants received from the
OCS. The terms of the OCS grants require that we manufacture our products that
are developed with such grants in Israel. In addition, we may not transfer the
technology developed pursuant to the terms of these grants to third parties
without the prior approval of a governmental committee.
Additionally, prior to being acquired by us in December 2001, eMation received
grants from the Israeli Government through the Marketing Fund in the aggregate
amount of $1.2 million and royalties in the aggregate amount of $0.2 million
have been repaid. As of December 31, 2002, $0.7 million of the remaining
potential $1.0 million of principal liability is accrued in other current
liabilities. We are obligated to pay royalties of 4.0% of revenues derived from
sales of products that result from grants received through the Marketing Fund.
Because of their significant stock ownership, our officers and directors can
exert significant control over our future direction
As of December 31, 2002, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 4.0
million shares, or approximately 15% of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of mergers or other business combination transactions or
a sale of all or substantially all of our assets.
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to our stockholders
The board of directors has the authority without any further vote or action on
the part of our stockholders to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
the preferred stock. This preferred stock, if it is ever issued, may have
preference over and harm the rights of the holders of our common stock. Although
the issuance of this preferred stock will provide us with flexibility in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
Our certificate of incorporation and by-laws include provisions that may have
the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control.
16
We may not be able to compete effectively in the Internet-related products and
services market
Our DRM solutions communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. We cannot
predict with any assurance whether the demand for Internet-related products and
services will increase or decrease in the future.
Critical issues concerning the commercial use of the Internet, including
security, privacy, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products. If these critical issues are not favorably
resolved, our business, financial condition or results of operations could be
adversely affected.
Our business is subject to changes in financial accounting standards, which may
affect our reported revenue, or the way we conduct business
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"). GAAP are subject to
interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants ("AICPA"), the SEC and various bodies
appointed by these organizations to interpret existing rules and create new
accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and interpretations of these rules. Additional interpretations issued by
the task force may have an adverse effect on how we report revenue or on the way
we conduct our business in the future.
17
Item 2
Properties
In September 2002, we entered into a lease for approximately 4,500 square feet
of space in an office building in the same business park as our former offices
located in Malvern, Pennsylvania. This facility is leased at an annual rental of
approximately $42,000, plus operating expenses (approximately $17,000 per year),
utilities and taxes, and is used for administrative activities. The lease
commenced in December 2002 and expires in November 2005.
In May 2002, we entered into a sub-lease for approximately 35,000 square feet of
space in an office building in the same business park as our former offices
located in Mansfield, Massachusetts. This facility is leased at an annual rental
of approximately $310,000, plus operating expenses (approximately $170,000 per
year), utilities and taxes, and is used for research and development, sales and
support, services and administrative activities. The sub-lease commenced in June
2002 and expires in July 2007.
We currently lease 5 other international sales offices in France, Holland and
Japan with a total of approximately 6,800 square feet of space. The combined
annual rental for these offices is approximately $350,000 and $233,000 for 2003
and 2004, respectively, and approximately $120,000 for 2005 through 2010. The
leases have terms expiring from April 2003 through February 2011. The lease for
our primary office in France expires in 2011, but is cancelable without penalty
in 2008 upon 6 months written notice. In 2002 we closed our Great Britain
facility and consolidated its activities in our offices in France.
We also lease approximately 1,600 square feet of space in Israel for research
and development activities at an annual rental of approximately $28,000. This
facility is leased through October 2003. We expect to close this office in 2003.
We believe our current facilities will be adequate to fulfill our needs for the
foreseeable future.
Prior to occupying our new offices in Mansfield, Massachusetts, we leased
approximately 12,000 square feet of space in an office building, located the
same business park as our new offices, for our research and development, sales
and support and administrative activities. In September 2002, we entered into a
sublease with a subtenant for the balance of the term of this lease. The lease
for our former offices expires in July 2004 and requires us to pay minimum
future rental payments totaling approximately $0.5 million as of December 31,
2002. Under the terms of the sublease agreement, we will receive minimum future
rental payments totaling approximately $0.3 million from the subtenant.
We also maintain approximately 9,000 square feet of office space in Marlborough,
Massachusetts under an operating lease. This space is no longer used for
operating purposes. The lease requires annual rental payments totaling
approximately $196,000 (including operating expenses) and expires in February
2009. The present value of the future lease payments, discounted at 5%, of
approximately $1.2 million was accrued by eMation prior to our acquisition of
eMation in December 2001. We are seeking to sublease this office.
18
Item 3
Legal Proceedings
Between February and April 2000, eleven class action lawsuits were filed against
certain of our current and former officers and directors and us in the United
States District Court for the Eastern District of Pennsylvania. On May 25, 2000,
the cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In
re RAVISENT Technologies Inc. Securities Litigation." Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Act of 1933, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder and seeks unspecified damages on behalf of a purported class of
purchasers of our stock during the period stated above. On July 3, 2000, we
filed a motion to dismiss the consolidated and amended class action complaint.
The motion is presently fully briefed and the parties are waiting for a hearing
date to be set for the motion. Certain of our employees and certain holders of
5% or more of Axeda common stock are members of the putative classes alleged in
these actions and therefore may have interests adverse to us with respect to the
alleged claims in these actions. We believe that such lawsuits or claims are
without merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend these
actions could substantially harm our results of operations, liquidity and
financial condition.
On November 27, 2001, a putative shareholder class action was filed against us,
certain of our officers and directors, and several investment banks that were
underwriters of our initial public offering. The action was filed in the United
States District Court for the Southern District of New York, purportedly on
behalf of investors who purchased our stock between July 15, 1999 and December
6, 2000. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against one or both of the Company and the
individual defendants. The claims are based on allegations that the underwriter
defendants agreed to allocate stock in our July 15, 1999 initial public offering
to certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases in the aftermarket at
pre-determined prices. Plaintiffs allege that the prospectus for our initial
public offering was false and misleading in violation of the securities laws
because it did not disclose these arrangements. This lawsuit is part of the "IPO
allocation" litigation involving the conduct of many underwriters in allocating
shares of successful initial public offerings. We believe that more than one
hundred and eighty other companies have been named in more than eight hundred
identical lawsuits that have been filed by some of the same plaintiffs' law
firms. Certain of our employees were members of the putative classes alleged in
these actions (the "the Individual Defendants"). On July 15, 2002, we moved to
dismiss all claims against the Individual Defendants and us. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without prejudice.
We believe that such lawsuit and claims are without merit and that we have
meritorious defenses to the actions. We plan to vigorously defend the
litigation. However, failure to successfully defend this action could
substantially harm our results of operations, liquidity and financial condition.
We received $1.3 million of the $1.8 million of the IA business purchase price
being held in escrow by a third party for indemnification purposes in March
2002. The remaining balance of approximately $0.55 million has been withheld
pending the settlement of a claim submitted by Phoenix. In June 2002 we
initiated an arbitration proceeding with the International Chamber of Commerce
seeking an order that the entire $0.55 million be disbursed to Axeda. Phoenix
filed an answer and counterclaim in the arbitration, claiming entitlement to the
entire $0.55 million. We filed an answer to the counterclaim, denying the claim.
A hearing date has not yet been set. The parties are currently in settlement
discussions.
From time to time, we have received, and expect to continue to receive, notices
of claims of infringement of other parties' proprietary rights and other claims
in the ordinary course of our business. See "FACTORS THAT MIGHT AFFECT FUTURE
RESULTS - We have received notices of claims and might become involved in
litigation over proprietary rights, which could be costly and time consuming."
We have accrued for estimated losses in the accompanying financial statements
for those matters where we believe the likelihood of an adverse outcome is
probable and the amount of the loss is reasonably estimable. The adverse
resolution of any one or more of these matters could have a material adverse
effect on our business, financial condition or results of operations.
19
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK
On January 14, 2002 we changed our name to Axeda Systems Inc. and effective as
of February 5, 2002, our common stock is quoted on the NASDAQ National Market
under the symbol XEDA. Prior to February 5, 2002 and since our initial public
offering in July 1999, our common stock was quoted on the NASDAQ National Market
under the symbol RVST. Prior to such time, there was no public market for our
common stock. On March 3, 2003, Axeda Systems Inc. had 27,292,969 outstanding
shares of common stock held by 170 record holders, not including stockholders
who beneficially own common stock held in nominee or street name. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the NASDAQ National Market.
2002 2001
------------------------- --------------------------
High Low High Low
---------- -------------- ------------- ------------
First Quarter..... $3.86 $2.15 $4.75 $1.75
Second Quarter.... $3.21 $1.11 $2.55 $1.31
Third Quarter..... $1.77 $0.38 $2.08 $1.06
Fourth Quarter.... $1.29 $0.25 $3.75 $1.50
We received a letter dated January 6, 2003, from the staff of the NASDAQ Stock
Market, or NASDAQ, which notified us that the bid price for our common stock had
been below $1.00 per share for a period of thirty consecutive days. NASDAQ
advised us that we would be given a period of ninety days within which to comply
with the minimum bid price requirement in order to maintain the listing of our
common stock on the NASDAQ National Market. If we are unable to demonstrate
compliance with the minimum bid requirement for ten consecutive days on or
before April 7, 2003, NASDAQ will provide us with written notification that our
common stock will be delisted. At that time we may appeal the staff's decision
to a NASDAQ Listing Qualification Panel. In the alternative, we may apply to
transfer our securities to the NASDAQ SmallCap Market. If we submit a transfer
application and pay the applicable listing fees by April 7, 2003, initiation of
de-listing proceedings will be stayed pending NASDAQ's review of our transfer
application. If the transfer application is approved, we will have a 180 day
grace period ending on July 7, 2003 from meeting the NASDAQ SmallCap listing
requirements and will be eligible for an additional 180 day grace period if we
meet the initial listing requirements for the NASDAQ SmallCap Market. We intend
to pursue all available options to meet the NASDAQ listing requirements. If our
common stock is delisted from the NASDAQ National Market, sales of our common
stock would likely be conducted on the SmallCap Market or in the
over-the-counter market. This may have a negative impact on the liquidity and
price of our common stock.
UNREGISTERED ISSUANCE OF SECURITIES
None.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and we do not
anticipate declaring or paying cash dividends in the foreseeable future. We
anticipate that we will retain all future earnings, if any, for use in our
operations and the expansion of our business. Payments of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
For information concerning common stock to be issued in connection with our
equity compensation plans, see Part III, Item 12, of this Annual Report on Form
10-K.
21
ITEM 6. Selected Financial Data
The following selected consolidated financial data (presented in thousands,
except share and per share amounts) are derived from our consolidated financial
statements. This data should be read in conjunction with the consolidated
financial statements and notes thereto (Item 8), and with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues:
License ............................................... $ 12,772 $ 6,036 $ 12,328 $ 12,710 $ 3,262
Services and maintenance .............................. 3,124 442 1,898 968 185
Hardware .............................................. 2,233 1,111 6,628 15,740 26,841
----- ----- ----- ------ ------
Total revenues ............................................ 18,129 7,589 20,854 29,418 30,288
------ ----- ------ ------ ------
Cost of revenues:
License ............................................... 2,849 1,629 3,374 1,874 248
Services and maintenance .............................. 4,210 223 733 259 106
Hardware .............................................. 1,288 1,122 6,189 13,732 24,192
Software amortization ................................. 1,943 171 -- -- --
Inventory charges ..................................... -- 18,502 1,708 -- --
------ ------ ------ ------ ------
Total cost of revenues .................................... 10,290 21,647 12,004 15,865 24,546
------ ------ ------ ------ ------
Gross profit .............................................. 7,839 (14,058) 8,850 13,553 5,742
Research and development
Non-cash compensation ................................... 163 2,100 801 200 139
Other research and development expense ................ 7,162 5,691 10,187 8,107 3,121
Sales and marketing
Non-cash compensation and other expense ............... 71 147 3,480 -- --
Other selling and marketing expense ................... 16,642 7,670 10,863 5,296 1,964
General and administrative
Non-cash compensation ................................. 1,304 780 467 308 --
Other general and administrative expense .............. 11,000 9,860 10,256 5,048 4,625
Provision for doubtful accounts .................... (45) 929 4,965 31 48
Depreciation and amortization ............................. 1,552 2,844 5,897 1,886 906
Special charges ........................................... 820 -- -- -- --
Impairment charges ........................................ 22,413 3,916 2,831 -- --
Acquired in-process research and development .............. -- 3,112 1,373 1,888 7,900
------------ ------------ ------------ ----------- -----------
Operating loss .................................... (53,243) (51,107) (42,270) (9,211) (12,961)
Gains (losses) on disposals of assets ..................... (138) 52,037 -- -- --
Interest income (expense), net ............................ 441 1,753 1,792 1,192 (722)
Other income (expense), net ............................... 554 (133) 51 -- --
------------ ------------ ------------ ----------- -----------
Income (loss) before provision for income taxes (benefit) . (52,386) 2,550 (40,427) (8,019) (13,683)
------------ ------------ ------------ ----------- -----------
Provision for income taxes (benefit) ...................... (459) 1,123 40 52 --
---------- ------ ------- ------ ------
Net income (loss) ......................................... $ (51,927) $ 1,427 $ (40,467) $ (8,071) $ (13,683)
============ ======== ========= ========= =========
Accretion of discount on mandatory redeemable preferred
stock .................................................... -- -- -- 659 754
------ ------ ------ ------ ------
Net income (loss) attributable to common shareholders ..... $ (51,927) $ 1,427 $ (40,467) $ (8,730) $ (14,437)
============ ============ ============ =========== =========
Basic net income (loss) per weighted average common share
outstanding .............................................. $ (1.92) $ 0.08 $ (2.44) $ (1.02) $ (4.94)
============ ============ ============ =========== ===========
Diluted net income (loss) per weighted average common share
share outstanding ........................................ $ (1.92) $ 0.07 $ (2.44) $ (1.02) $ (4.94)
============ ============ ============ =========== ===========
Weighted average number of common shares outstanding used in
calculation of basic net income (loss) per common share ... 27,063,751 18,559,185 16,606,795 8,532,140 2,920,677
========== ========== ========== ========= =========
Weighted average number of common shares outstanding used
in calculation of diluted net income (loss) per common
share .................................................... 27,063,751 20,194,713 16,606,795 8,532,140 2,920,677
========== ========== ========== ========= =========
22
ITEM 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.,
or eMation, a private company organized under the laws of the State of Israel.
The acquisition gave us an immediate entry into the DRM market.
Our future license and services and maintenance revenues will be driven by our
DRM Solutions. For the year ending December 31, 2002 revenues from our DRM
Solutions were approximately $10.9 million or 60% of our total revenues for the
year.
eMation historically derived its main source of revenues from its industrial
automation products, which are now offered as Axeda Agent components of our DRM
system. While we continue to sell the components of the DRM system, such as the
Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft
OPC, to support our traditional industrial automation business, we expect that
sales of these products will decrease in the future as we devote most of our
resources to the development and support of the Axeda DRM system.
We believe that you should not rely on the results for any period prior to the
eMation acquisition as an indication of our future performance because our
business model has changed significantly since the sales of our CE and IA assets
in the first quarter of 2001, the license of our PC technology to Sonic in May
2002, and the acquisition of eMation in December 2001. Each of these
transactions is discussed below.
Recent Events
We entered into a Software Distribution Agreement in May 2002 with Sonic IP,
Inc. ("Sonic"), a wholly-owned subsidiary of Sonic Solutions. As a result, we
exited the PC business and terminated or assigned to Sonic substantially all of
the customer contracts of our PC business. Sonic paid us $2 million for the
exclusive and perpetual license to all of the intellectual property or IP of our
PC business and for certain furniture and computer equipment. The equipment,
which had a net book value totaling approximately $331,000, was used by the
employees of our PC business and was not essential to the functionality of the
licensed IP. In connection with the closing of the agreement, approximately 10
of our employees in the PC business accepted employment offers from Sonic and
were paid inducements related to their acceptance totaling approximately
$106,000. These inducements are included in special charges in the accompanying
consolidated statements of operations for the year ending December 31, 2002. We
also designated the remaining 14 employees from the PC business to provide
unspecified services to Sonic to create improvements, R&D information, and
computer software through December 31, 2002. We provided these services from May
through August 2002 as part of the base license agreement without additional
charge to Sonic. Sonic paid us $399,000 and $108,400 for such services from
August 24, 2002 through December 31, 2002 and April to May 2002, respectively,
which approximated our cost for the services rendered. As of January 2003, 13 of
our former employees accepted employment with Sonic.
Also as part of our strategy to exit the PC business, we vacated our offices in
San Jose, California in May 2002, and in July 2002 we terminated our lease for
this facility. The original term of the lease ended in March 2005. In July 2002,
we paid approximately $135,000, including $64,000 held by the lessor as security
from the inception of the lease, to the lessor as an inducement to cancel the
lease. We also paid $210,000 in July 2002 and, for nominal consideration, sold
furniture, computer equipment and leasehold improvements to the new lessee as
incentives to the new lessee to enter into a lease for the premises with the
lessor. The total cash payments of $345,000, including the foregone security
deposit, and the net book value of the assets sold of $168,000 are included in
special charges in the accompanying consolidated statements of operations for
the year ended December 31, 2002.
On December 7, 2001, we acquired all of the outstanding shares of eMation in
consideration for: 8 million shares of our common stock; options exercisable for
up to 1,428,710 shares of our common stock in connection with assumed eMation
stock options, 530,000 of which are exercisable for $0.01 per share and the
remaining 898,710 exercisable at $2.14 per share; options exercisable at $2.14
for up to 113,600 shares of our common stock issued at closing pursuant to our
1999 Stock Incentive Plan; and warrants exercisable for up to 7,000 shares of
our common stock exercisable at $2.14 issued to ex-employees of eMation in
consideration for cancellation of outstanding options to purchase shares of
eMation. We also issued warrants at closing exercisable for up to 108,238 shares
of our common stock with exercise prices ranging from $4.88 to $21.51 per share
to holders of warrants exercisable for shares of eMation.
The acquisition was recorded under the purchase method of accounting. We
incurred transaction costs of approximately $3.4 million related to the eMation
acquisition and assumed approximately $5 million of eMation net debt. Prior to
the acquisition, we loaned a total of $4.3 million to eMation for working
capital purposes. We also paid sign-on bonuses of $0.3 million to three of
eMation's executives. In connection with the acquisition, we expensed $3.1
million of the purchase price as acquired in-process research and development
("IPR&D") and recorded identifiable intangible assets and goodwill of
23
approximately $9.7 million and $20.8 million, respectively. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), we no longer amortize goodwill, but
instead test it for impairment at least annually and at the same time every
year. See "Other Charges," below.
An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition was deposited with a third party escrow agent to be held in escrow
to compensate us for certain losses and taxes that may arise as a result of the
eMation acquisition. This escrow arrangement expired February 21, 2003. The
shareholders' agent appointed pursuant to the share purchase agreement agreed to
us submitting a claim on the escrow fund for the return of 98,127 shares and the
remaining shares held in escrow were returned to former eMation shareholders.
Any shares returned to us will reduce the balance of goodwill recorded in the
acquisition.
We sold and licensed substantially all of our assets related to our CE business
for $55.6 million as of March 1, 2001 to STMicroelectronics, NV, a Dutch
corporation, STMicroelectronics, Inc., a Delaware corporation, and
STMicroelectronics GmbH (collectively, STMicroelectronics). In addition,
approximately 76 of our employees, most of whom were associated with our CE
business, accepted employment with STMicroelectronics. We also granted
STMicroelectronics certain non-exclusive rights to license and distribute
certain of our technology used in our IA products and our PC products. In
addition, we agreed not to compete in significant aspects of the CE market until
March 1, 2006. Revenues and gross margin for the CE business totaled
approximately $0.4 million, or 6% of total revenues, and $0.3 million, or 7% of
total gross profit, respectively, for the year ending December 31, 2001.
We sold substantially all of the assets, excluding inventory, related to our IA
business as of March 23, 2001 to Phoenix for $18 million. The assets sold
included certain of the contracts, equipment, intangible assets, intellectual
property, prepaid expenses and other assets primarily related to the operation
of the IA business. Under the asset acquisition agreement, Phoenix purchased our
e-Surfer embedded software Internet browser and related hardware designs for the
IA market. In addition, in connection with this asset sale, 13 of our employees
associated with the IA business accepted employment with Phoenix. Revenues for
the IA business totaled approximately $1.0 million, or 13% of total revenues and
were made at amounts approximating our carrying value resulting in nominal gross
margin for the year ending December 31, 2001. Revenues associated with our
remaining IA hardware assets totaled approximately $2.2 million, or 12%, of
total revenues, and $1.0 million, or 13%, of total revenues for the years ending
December 31, 2002 and 2001, respectively. As of December 31, 2002 our
inventories, which relate primarily to our former IA business, are completely
reserved, thus, future sales of our inventories, if any, will result in
substantial gross margins because there would be no cost of revenues.
Other Charges
During the fourth quarter of 2002, following our annual review of goodwill we
determined, with the assistance of an independent valuation consultant, that the
carrying value of our reporting unit's assets exceeded its fair value. As such,
a detailed valuation analysis was performed utilizing our latest financial
projections, estimates of corresponding cash flows and discount rates, which
resulted in the recognition of an impairment charge for our goodwill and other
identified intangible assets of approximately $22.4 million. As of December 31,
2002 the remaining carrying value of our goodwill and identified intangible
assets was approximately $5.7 million, and will be tested annually pursuant to
SFAS 142. If our current financial projections or related assumptions are
modified in the future, we may be required to record additional impairment
charges.
In 2001, we recognized an impairment charge of approximately $1.7 million to
reduce the amount of acquired technology rights associated with a prior equity
financing to its estimated fair value of zero. This impairment charge was
recorded following a periodic review of the expected future cash flows from our
products using the acquired technology and was attributable to certain
technology acquired from Intel in connection with the sale of our Series C
preferred stock in 1999. During the fourth quarter of 2001, we determined that
we would not allocate future resources to assist in the market growth of this
technology and we did not anticipate any material future sales of products
incorporating this technology. This determination was based upon factors
including the projected cash flows expected from the use of the acquired
technology and potential cash flows that could be expected from its disposition,
as well as our strategic shift to become an enterprise software and services
company.
Based upon a periodic review of the Cinax technology in December 2001, we
determined that the carrying value of the goodwill and other intangible assets
was not recoverable and recorded an impairment charge of approximately $2.2
million. This determination was based upon various factors, including the
projected cash flows expected from the use of the assets and their eventual
disposition, as well as our strategic shift to become an enterprise software and
services company.
24
For year ending December 31, 2001 we recorded inventory charges of approximately
$18.5 million. The charges, relating to our former IA business, were comprised
of increased reserves of approximately $14.2 million for IA components and
approximately $4.6 million for Internet set-top boxes. The reserves were based
on various factors including expected demand, current market prices, industry
conditions, alternative uses, distribution channels and manufacturers'
warranties.
Geographic Areas
Information pertaining to revenues attributed to our country of domicile, the
United States of America, foreign sales in total and individual foreign
countries is included in note 20 of the notes to the consolidated financial
statements, filed herewith at Item 8-Financial Statements and Supplementary
Data. Revenues from individual countries are based upon information available to
us regarding our customers' country of domicile.
Information pertaining to long-lived assets is included in note 17 of the notes
to the consolidated financial statements, filed herewith at Item 8--Financial
Statements and Supplementary Data.
25
Results of Operations
The following table sets forth, for the periods indicated, the dollar amounts
and the dollar amounts expressed as a percentage of total revenues reflected in
our consolidated statements of operations:
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
----------------------- ---------------------- ----------------------
$ `000's % $ `000's % $ `000's %
-------- ----- -------- ----- -------- -----
Revenues:
License....................................................$ 12,772 70.5% $ 6,036 79.6% $ 12,328 59.1%
Services and maintenance ................................... 3,124 17.2 442 5.8 1,898 9.1
Hardware ................................................... 2,233 12.3 1,111 14.6 6,628 31.8
----- ---- ----- ---- ----- ----
Total revenues ................................................. 18,129 100.0 7,589 100.0 20,854 100.0
------ ----- ----- ----- ------ -----
Cost of revenues:
License .................................................... 2,849 15.7 1,629 21.5 3,374 16.2
Services and maintenance ................................... 4,210 23.2 223 2.9 733 3.5
Hardware ................................................... 1,288 7.1 1,122 14.8 6,189 29.7
Software amortization .................................... 1,943 10.7 171 2.2 -- --
Inventory charges ........................................ -- -- 18,502 243.8 1,708 8.2
------ ----- ----- ----- ------ -----
Total cost of revenues ......................................... 10,290 56.7 21,647 285.2 12,004 57.6
------ ----- ----- ----- ------ -----
Gross profit ................................................... 7,839 43.3 (14,058) (185.2) 8,850 42.4
Research and development (R&D)
Non-cash compensation ...................................... 163 0.9 2,100 27.7 801 3.8
Other R&D expense .......................................... 7,162 39.5 5,691 75.0 10,187 48.8
Sales and marketing (S&M)
Non-cash compensation and other expense .................... 71 0.4 147 1.9 3,480 16.7
Other S&M expense .......................................... 16,642 91.8 7,670 101.1 10,863 52.1
General and administrative (G&A)
Non-cash compensation ...................................... 1,304 7.2 780 10.3 467 2.2
Other G&A expense .......................................... 11,000 60.7 9,860 129.9 10,256 49.2
Provision for doubtful accounts (net of recoveries) ....... (45) (0.2) 929 12.2 4,965 23.8
Depreciation and amortization .................................. 1,552 8.6 2,844 37.5 5,897 28.3
Special charges ................................................ 820 4.5 -- -- -- --
Impairment charges ............................................. 22,413 123.6 3,916 51.6 2,831 13.6
Acquired in-process research and development ................... -- -- 3,112 41.0 1,373 6.6
------ ----- ----- ----- ------ -----
Operating loss ......................................... (53,243) (293.7) (51,107) (673.4) (42,270) (202.7)
Gains (losses) on disposals of assets .......................... (138) (0.7) 52,037 685.7 -- --
Interest income (expense), net ................................. 441 2.4 1,753 23.1 1,792 8.6
Other income (expense), net .................................... 554 3.1 (133) (1.8) 51 0.2
------ ----- ----- ----- ------ -----
Income (loss) before provision for income taxes (benefit)
benefit ....................................................... (52,386) (288.9) 2,550 33.6 (40,427) (193.9)
Provision for income taxes (benefit) ........................... (459) (2.5) 1,123 14.8 40 0.2
------ ----- ----- ----- ------ -----
Net income (loss) .............................................. $(51,927) (286.4)% $ 1,427 18.8% $(40,467) (194.1)%
======== ====== ======= ==== ======== ======
26
Years Ended December 31, 2002 and 2001
Revenues. Total revenues increased by 139%, or $10.5 million, from $7.6 million
for the year ending December 31, 2001 to $18.1 million for the year ending
December 31, 2002. Sales from our DRM systems contributed $9.3 million to the
increase in revenues while sales of our Internet appliance inventories and PC
services added $1.1 million and $0.5 million, respectively, to our total
revenues and were partially offset by a decrease of $0.4 million in our CE
business over the prior year. Revenues across our license, services and
maintenance, and hardware streams increased $6.7 million, $2.7 million, and $1.1
million, respectively, from the prior year.
License revenues. License revenues increased by approximately $6.8 million from
$6.0 million for the year ending December 31, 2001 to $12.8 million for the year
ending December 31, 2002. The increase was attributable to sales of our DRM
products, which added $6.7 million to our revenues for the year ending December
31, 2002. In the future we expect DRM license revenues to increase, as software
solutions related to our DRM system products continue to grow. We do not expect
to record material license revenues related to our PC business subsequent to
December 31, 2002.
Hardware revenues. Hardware revenues increased by approximately $1.1 million
from $1.1 million for the year ending December 31, 2001 to $2.2 million for the
year ending December 31, 2002 due to increased sales of components related to
Internet appliances and Internet set-top boxes. As of December 31, 2002 our
inventories, which relate primarily to our former IA business, are completely
reserved, thus, future sales of our inventories, if any, will result in
substantial gross margins, because there would be no cost of revenues. We do not
expect to record material hardware revenues subsequent to December 31, 2002.
Services and maintenance revenues. Services and maintenance revenues increased
607% from $0.4 million for the year ending December 31, 2001 to $3.1 million for
the year ending December 31, 2002. The increase was attributable to services and
maintenance plans sold with our DRM system products as well as services provided
to Sonic Solutions, which contributed $2.6 million and $0.5 million,
respectively, for the year ending December 31, 2002, offset by a decrease in
services of $0.4 million associated with our former CE business, which was sold
to STMicroelectronics in March 2001. We expect our services and maintenance
revenues to increase in the future as we license more DRM systems products.
Concentration. During 2002 a substantial portion of our revenues were derived
from a small number of customers. For the year ending December 31, 2002, five
customers accounted for $6.2 million, or 34%, of our total revenues and 36% of
our total gross profit excluding software amortization. In the year ending
December 31, 2001, three customers accounted for 36% of our total revenues and
39% of our total gross profit (excluding inventory charges of $18.5 million). In
the future, we expect our revenues to be less concentrated as sales of our
enterprise software and services span a wider customer base.
International. In the year ending December 31, 2002 companies based in North
America accounted for 57% of our revenues. In the future we expect a greater
portion of our revenues to be derived outside of North America.
Cost of Revenues. Cost of revenues decreased $11.4 million or 52% from $21.6
million for the year ending December 31, 2001 to $10.3 million for the year
ending December 31, 2002. The decrease was a result of an $18.5 million
inventory charge recorded during 2001 relating to our former IA business,
partially offset by increases relating to our license, services and maintenance
and hardware of approximately $1.2 million, $4.0 million, and $0.2 million,
respectively, from the prior year. In addition, we are amortizing developed and
core technologies, acquired in the eMation acquisition, which added
approximately $1.8 million to our cost of revenues for the year ending December
31, 2002.
The $1.2 million increase in cost of license revenues over the prior year is due
to an additional $1.0 million in costs associated with greater sales of our DRM
solutions and a net increase of $0.2 million for our former PC products. The net
increase in our PC cost of license revenues was due to a license arrangement we
have with a PC graphics component manufacturer, and increases in Dolby royalty
rates due to reduced sales of products incorporating Dolby, offset by decreases
in Dolby fees in total, attributable to lower sales of our PC products. The
increase of $0.2 million in cost of hardware revenues corresponds to the
increase in our hardware sales. The $4.0 million increase in cost of services
and maintenance is attributable to an approximate $3.6 million increase from our
DRM system services and maintenance plans and a $0.5 increase in services
related to our former PC business offset by a $0.1 million decrease in services
related to our former CE business. We expect our cost of revenues related to
licenses as a percentage of license revenues to decrease in the future as our
license revenues shift completely to our DRM products. Non-cash amortization of
acquired technology will represent approximately $0.7 million of our cost of
revenues for the year ending December 31, 2003.
Gross Profit. Excluding the $18.5 million charge for inventory recorded during
the year ending December 31, 2001 and the $1.9 million and $0.2 million software
amortization expense recorded for the years ending December 31, 2002 and
December 31, 2001, gross profit increased by $5.2 million, or 112%, from $4.6
million for the year ending December 31, 2001 to $9.8 million for the year
ending December 31, 2002. The increase is attributable to increases in license
revenues associated with our DRM Systems sales and increases in gross margins
associated with sales of our fully reserved inventory.
27
For the year ending December 31, 2002, 70% of our total revenues were derived
from licenses, and 17% from services and maintenance, in comparison to 80% and
6%, respectively, in 2001. As a percentage of total revenues, gross profit,
excluding the charges recorded for inventory and software amortization,
decreased from 61% for the year ending December 31, 2001 to 54% for the year
ending December 31, 2002, due to negative gross profit from our services and
maintenance operations. The negative gross profit from our services and
maintenance operations is attributable to the delivery of a large number of
non-billable proof of concepts, or POCs, delivered to prospective customers
during the year. In order to establish a stronger market presence and earn a
prospective customer's commitment, we perform various marketing activities
including delivering proofs of concepts to potential customers. These POCs
provide a business case to demonstrate that our product can successfully operate
in our customer's environment, perform according to published specifications and
deliver cost savings. We plan on delivering fewer POCs in the future when
required to gain market share and attract new customers. As a result we expect
to experience improved service margins.
Research and Development Expense. Other research and development expenses
consist of staff, staff-related, professional and other development related
support costs associated with the development of new products, customization of
existing products for customers, quality assurance and testing. Research and
development expenses increased $1.5 million or 26%, from $5.7 million for the
year ending December 31, 2001 to $7.2 million for the year ending December 31,
2002.
The increase in research and development expenses was attributable to a full
year of DRM expenses (up $5.1 million, from $0.5 million in 2001 to $5.6 million
in 2002). This increase was partially offset by a decrease in research and
development expenses of $2.2 million in our former PC development team, and the
elimination of the CE and IA development teams in 2001, which contributed
approximately $0.7 million and $0.8 million to the decrease. As a percentage of
total revenues, other research and development expenses decreased from 75% to
40%. The decrease in research and development expenses as a percentage of total
revenues resulted from higher revenues. We expect research and development
expenses to decrease in total dollars in 2003, compared to 2002, as we no longer
have the costs associated with our former PC development team, and have aligned
our cost structure to more closely meet our organization's needs.
Non-cash Compensation Research and Development Expense. Non-cash research and
development expense consists of compensation related to stock options. Non-cash
research and development expense decreased 92% from $2.1 million for the year
ending December 31, 2001 to $0.2 million for the year ending December 31, 2002.
The immediate recognition in March 2001 of prepaid and deferred stock
compensation that would have continued to vest through December 2003, relating
to reductions in staffing in connection with the closing of our Vancouver office
in March 2001,contributed $1.5 million to the decrease. In addition, $0.5
million of the decrease resulted from amortization of deferred compensation
recorded in 2001 in connection with stock options granted to employees in
December 2000. No similar expenses were recorded for the year ending December
31, 2002. This expense is offset by amortization of $0.1 million for deferred
compensation recorded in connection with stock options granted to employees in
December 2001 at less than fair market value for which no similar expense was
recorded in 2001.
Sales and Marketing Expense. Other selling and marketing expenses consist of
salaries, travel expenses and costs associated with trade shows, advertising and
other marketing efforts, as well as technical support costs. Selling and
marketing expenses increased $9.0 million or 117% from $7.7 million for the year
ending December 31, 2001 to $16.6 million for the year ending December 31, 2002.
The increase in sales and marketing expense is attributable to the inclusion of
the acquired eMation sales, marketing and business development group, which
contributed $15.1 million, for the year ending December 31, 2002. Partially
offsetting this increase was the elimination of the sales and marketing teams
associated with our former CE and IA businesses, which resulted in decreases of
$0.4 million and $0.5 million, respectively, for the year ending December 31,
2002. Decreases of approximately $1.8 million relating to the settlement of a
South American distribution rights agreement and $2.8 million from reduced staff
in our former PC sales and marketing teams also partially offset the increase.
Brand expenses associated with our name change in 2001 also contributed
approximately $0.6 million to the decrease. As a percentage of total revenues,
sales and marketing expenses decreased from 101% to 92%. We expect sales and
marketing expenses to decrease in total dollars in 2003, compared to 2002, as we
no longer have the sales and marketing efforts associated with our former PC
products and continue to follow tight cost controls within this function.
Non-cash Compensation Sales and Marketing Expense. Non-cash sales and marketing
expense consists of compensation related to stock options. Non-cash sales and
marketing expense decreased by less than $0.1 million or 52% to $0.1 million for
the year ending December 31, 2002.
Other General and Administrative Expense. Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
human resources, information systems and other management departments. Other
general and administrative expenses increased $1.1 million or 12% from $9.9
million for the year ending December 31, 2001 to $11.0 million for the year
ending December 31, 2002. As a percentage of total revenues, other general and
administrative expenses decreased from 130% to 61% of total revenues due to the
28
proportionally larger increase in total revenues. The increase in other general
and administrative expenses was mainly due to the addition of the acquired
eMation general and administrative function, which contributed $3.1 million to
the increase, partially offset by decreases in severance of $1.1 million, staff
retention expense of $0.4 million, executive recruiting expense of approximately
$0.3, and rent and other expense of $0.2 million. Included in the $3.1 million
increase is a one time lease charge of $0.2 million representing the excess of
the future minimum rental payments to be made over the future minimum sublease
payments to be received for a property vacated during the third quarter of 2002.
We expect total general and administrative expenses for 2003 to decrease from
the total 2002 amount, as we focus on our infrastructure needs, consolidate
offices, reduce overhead expenses and follow tight cost controls.
Non-cash Compensation General and Administrative Expense. Non-cash general and
administrative expense consists of amortization of compensation related to stock
options. Non-cash general and administrative expense increased from $0.8 million
for the year ending December 31, 2001 to $1.3 million for the year ending
December 31, 2002. The increase is attributable to a $0.4 million expense
incurred for the acceleration of option vesting in accordance with certain
employment agreements offset by $0.1 million for the acceleration of option
vesting in 2001. The remaining portion of the increase is attributable to a
one-time charge recognized in 2002 of $0.2 million for the modification of stock
options held by a former employee.
Provision for doubtful accounts. The provision for doubtful accounts represents
management's best estimate of the doubtful accounts for each period. During the
year ending December 31, 2002 we had net recoveries of less than $0.1 million
from previously reserved accounts resulting in a reversal of this expense. In
the future we expect this expense to increase as a percentage of revenues as a
result of increased DRM revenues.
Depreciation and amortization. We recorded depreciation and amortization of $1.6
million for the year ending December 31, 2002, compared to $2.8 million for the
year ending December 31, 2001. The sales of the assets of our CE and IA
businesses, both of which were sold in March 2001, contributed $1.2 million of
the decrease, while the decrease in amortization expense relating to our Cinax
goodwill accounted for $1.0 million. Offsetting these decreases was an increase
of approximately $0.9 million attributable to depreciation of assets and
amortization of intangibles acquired in the purchase of eMation. In the future
we expect depreciation and amortization expense to remain the same, as decreases
from our former PC assets are offset by increases relating to our DRM assets.
Impairment Analysis. Under SFAS 142, goodwill acquired in a business combination
after June 30, 2001 is no longer amortized. The provisions of SFAS 142 require
that goodwill be tested for impairment on an annual basis at the same time every
year. Accordingly, we have not recorded amortization expense in 2002 for
goodwill of approximately $3.7 million acquired in our purchase of eMation in
December 2001. Intangible assets acquired in a business combination and
recognized as an asset apart from goodwill must arise from contractual or other
legal rights or otherwise are separable. Under SFAS 142, recognized intangible
assets with finite useful lives are amortized over the period in which the
assets are expected to contribute directly or indirectly to our future cash
flows. We recorded identified intangible assets totaling approximately $9.7
million in connection with our purchase of eMation, comprised of developed and
core technologies of approximately $1.4 million and $7.0 million, respectively,
patent applications of approximately $1.0 million and customer base of
approximately $0.3 million. The developed and core technologies are being
amortized over their estimated useful lives of 2 and 5 years, respectively, and
are recorded as cost of revenues, which totaled $1.9 million for the year ending
December 31, 2002. Prior to the impairment analysis of goodwill in November
2002, our patent applications and customer base were amortized over their
estimated useful lives of 5 years and included with operating expenses, which
totaled approximately $0.2 million for the year ending December 31, 2002.
During November 2002 we completed our annual impairment test of goodwill in
accordance with SFAS No. 142. Based upon the results of the first step
impairment indicators as described in SFAS 142, we also tested our identified
intangible assets for impairment. Using our latest forecast data and with the
assistance of an independent, national valuation firm, we performed a fair
market value analysis on our reporting unit. Due to adverse market conditions,
and a slower than expected rate of adoption of our software technology in our
industry, we determined that the fair value of our reporting unit could not
support the carrying value of its intangible assets and, accordingly, recognized
a goodwill and identified intangible asset impairment charge of approximately
$22.4 million in 2002. If our estimates or related assumptions change again in
the future, we may be required to record additional impairment charges in
accordance with SFAS No. 142.
Special charges. Special charges for the year ending December 31, 2002 consist
of items related to our exit from the PC business in May 2002. The charges
include $0.3 million for furniture and equipment and employee inducements and
termination expenses related to our license agreement with Sonic Solutions and
lease termination costs and inducements totaling approximately $0.5 million,
including $0.2 million for furniture and equipment, for our San Jose facility.
Gains and (losses) on disposals of assets. During the year ending December 31,
2002 we recorded charges of $0.1 million for the disposal of certain assets that
were no longer utilized or needed for our continuing operations. During the year
ending December 31, 2001 we recorded gains of approximately $47.5 million and
$4.5 million as a result of the sale of assets related to our former CE and
former IA business respectively, in March 2001.
29
Interest income and (expense), net. Net interest income and expense decreased by
$1.3 million, or 75%, for the year ending December 31, 2002 compared to the
comparable period in 2001. The decrease is the result of lower average cash
balances and lower bank interest rates in 2002.
Other income and (expense). During the year ending December 31, 2002 we
recorded, as other income, $0.5 million in connection with the settlement of a
vendor dispute involving inventory for which a portion of our total obligation
was forgiven. There were no equivalent charges recorded in the prior year.
Provision for income taxes (benefit). The income tax benefit recorded for the
year ending December 31, 2002 is attributable to the reversal of certain prior
year U.S. income tax accruals no longer necessary as a result of newly enacted
tax legislation in 2002, and partially offset by a provision for certain foreign
income taxes.
30
Years Ended December 31, 2001 and 2000
Revenues. Total revenues decreased 64% or $13.3 million from $20.9 million for
the year ending December 31, 2000 to $7.6 million for the year ending December
31, 2001. Revenues across our former PC, CE & IA businesses decreased from the
prior year by $7.2 million, $1.2 million and $6.5 million, respectively, and
were partially offset by an increase of $1.6 million in our revenues as a result
of our acquisition of eMation in December 2001. Revenues across our license,
services and hardware streams decreased $6.3 million, $1.5 million, and $5.5
million, respectively, from the prior year. The decrease in revenues was due to
the discontinuance of hardware product lines during 2000, increased competition
and continued weakness in the personal computer industry, and the sale of
substantially all of the assets of our CE and IA businesses in March 2001.
License revenues. License revenues decreased by $6.3 million from $12.3 million
for the year ended December 31, 2000 to $6.0 million for the year ended December
31, 2001. The decrease was mainly attributable to increased competition and
continued weakness in the PC industry resulting in reduced unit sales of our
CineMaster product line, price erosion from a significant customer, and our
strategic shift out of the digital media market. As a result of the foregoing,
we experienced a significant loss of business from three large PC OEM's of
approximately $6.9 million. These decreases were partially offset by an increase
in our web-based business totaling approximately $0.7 million for the year.
Additional factors impacting license revenues include a decrease in our IA
revenues of $1.5 million, which was offset by a $1.6 million increase in
revenues attributable to sales of eMation's products subsequent to the
acquisition.
Hardware revenues. Hardware revenues decreased 83% from $6.6 million for the
year ended December 31, 2000 to $1.1 million for the year ended December 31,
2001. Approximately $4.8 million of the decrease was attributable to decreased
IA units sold in 2001 and the sale of the assets of our IA business in March
2001. The remainder of the decrease was due to a decrease in sales of PC related
hardware to contract manufacturers in March 2001.
Service revenues. Service revenues decreased 77% from $1.9 million for the year
ended December 31, 2000 to $0.4 million for the year ended December 31, 2001.
Approximately $1.2 million of the decrease was attributable to service
agreements associated with our CE business, which was sold to STMicroelectronics
in March 2001. The remainder of the decrease was due to the sale of the assets
of our IA business, which was sold to Phoenix in March 2001.
Concentration. For the year ended December 31, 2001, our top three customers,
including a materials broker and a fixed-fee customer for our former DVD
technology, accounted for 37% of our total revenues. We previously sold our
digital media products primarily to PC and computer graphics chip and board
manufacturers and distributors in North America, Europe, and the Pacific Rim. In
the year ended December 31, 2001 companies based in North America accounted for
a majority of our revenues.
Cost of Revenues. Excluding the charges for inventory reserves, cost of revenues
decreased 69% or $7.2 million from $10.3 million for the year ended December 31,
2000 to $3.1 million for the year ended December 31, 2001. Cost of revenues
relating to our license, services and hardware revenues decreased $1.7, $0.5,
and $5.1 million, respectively, from the prior year. The $1.7 million decrease
in cost of license revenues corresponds directly to the decrease in license
revenues, offset by higher per unit Dolby Digital fees, which were associated
with lower unit volumes. The decrease in cost of hardware is directly associated
with a decrease in our Internet appliance sales.
Gross Profit. Gross profit decreased from $8.9 million for the year ended
December 31, 2000 to $(14.1) million for the year ended December 31, 2001,
primarily due to net charges for inventory reserves of approximately $18.5
million. Excluding the inventory charges in 2001 and 2000, gross profit
decreased from $10.6 million to $4.4 million due mainly to lower revenues.
For the year ended December 31, 2001, 80% and 6% of our total revenues were
derived from license and services revenues, respectively, in comparison to 59%
and 9%, respectively, in 2000. The gross profit percentage for license revenues
and services revenues is much higher than that from hardware sales. As a
percentage of total revenues, gross profit, excluding the charges recorded for
inventory reserves, increased from 51% for the year ended December 31, 2000 to
59% for the year ended December 31, 2001, primarily as a result of a higher
proportion of license revenues, partially offset by an increase in the per-unit
cost of license fees for technologies incorporated into our former PC products
and a decrease in services revenues due to the sale of our CE assets.
Other Research and Development Expense. Other research and development expenses
consist of staff, staff-related, professional and other development related
support costs associated with the development of new products, customization of
existing products for customers, quality assurance and testing. Research and
development expenses decreased 44%, from $10.2 million for the year ended
December 31, 2000 to $5.7 million for the year ended December 31, 2001.
The decrease in research and development expenses was due to the elimination of
the CE and IA development teams in the first quarter of 2001, which contributed
approximately $3.4 million and $2.1 million, respectively, to the decrease. This
decrease was partially offset by increases in staff expenses including those
related to our acquisition of eMation of approximately $0.5 million and staff
retention expense of approximately $0.3 million. As a percentage of total
revenues, research and development expenses increased from 49% to 75%. The
31
increase in research and development expenses as a percentage of total revenues
resulted from lower revenues.
Non-cash Research and Development Expense. Non-cash research and development
expense consists of compensation related to stock options and
acquisition-related stock compensation. Non-cash research and development
expense increased 162% from $0.8 million for the year ended December 31, 2000 to
$2.1 million for the year ended December 31, 2001. $1.5 million of the increase
over the prior year is due to the immediate recognition of the prepaid and
deferred stock compensation related to reductions in staffing in connection with
the closing of our Vancouver office in March 2001, offset by a $0.2 million
decrease related to the sale of the CE assets in March 2001.
Other Selling and Marketing Expense. Other selling and marketing expenses
consist of salaries, travel expenses and costs associated with trade shows,
advertising and other marketing efforts, as well as technical support costs.
Sales and marketing expenses decreased 29% from $10.9 million for the year ended
December 31, 2000 to $7.7 million for the year ended December 31, 2001. The
increase in other selling and marketing expenses as a percentage of total
revenues resulted from lower revenues.
The decrease in sales and marketing expense is mainly a result of the sale of
the assets of our CE and IA businesses, which contributed $1.4 million and $2.8
million, respectively, for the year ending December 31, 2001. Additionally,
decreases of approximately $0.6 million resulted from reduced use of outside
consultants. These decreases were offset by increases of approximately $0.9
million relating to the addition of the eMation sales force, approximately $0.7
million relating to our name change and branding efforts in connection with our
new corporate identity, and $0.3 million of staff related retention expense. As
a percentage of total revenues, sales and marketing expenses increased from 52%
to 101%.
Non-cash Selling and Marketing Expense. Non-cash selling and marketing expense
consist of compensation related to stock options and warrants. Non-cash sales
and marketing expense decreased 96% from $3.5 million for the year ended
December 31, 2000 to $0.1 million for the year ended December 31, 2001. The
decrease relates to the amortization of warrants for $2.8 million issued in
connection with the American Trading S.A. agreement in June 2000. These warrants
were cancelled in the first quarter of 2001. The decrease is also attributable
to a one-time charge of $0.5 million for the modification of stock options held
by two former employees. Stock options granted to employees at less than fair
market value are recorded as deferred compensation expense and amortized over
the applicable vesting periods of two to four years.
Other General and Administrative Expense. Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
human resources, information systems and other management departments. Other
general and administrative expenses decreased 4% from $10.3 million for the year
ended December 31, 2000 to $9.9 million for the year ended December 31, 2001.
Other general and administrative expenses as a percentage of total revenues
increased from 49% to 130% due to the decrease in total revenues.
In absolute dollars, the decrease in other general and administrative expenses
was due to decreases in professional fees related to our class action litigation
of $0.5 million, professional fees of $0.5 million, other professional fees
pertaining to the pursuit of several strategic initiatives of approximately $0.5
million, and travel and conference expenses of $0.8 million. Offsetting these
decreases were increases in severance and retention expenses of $1.2 million, as
well as the addition of eMation's expenses since December 7, 2001, which totaled
$0.7 million.
Non-cash General and Administrative Expense. Non-cash general and administrative
expense consists of amortization of compensation related to stock options.
Non-cash general and administrative expense increased 67% from $0.5 million for
the year ended December 31, 2000 to $0.8 million for the year ended December 31,
2001. The increase is the result of amortization of deferred compensation
recorded in connection with stock options granted to employees at less than fair
market value on the date of grant in July and August 2001.
Provision for Doubtful Accounts. The provision for doubtful accounts represents
management's best estimate of the doubtful accounts for each period. The
provision decreased 81% from $5.0 million for the year ended December 31, 2000
to $0.9 million for the year ended December 31, 2001. As a percentage of
revenues, the provision decreased from 24% to 12% for the years ended December
31, 2000 and 2001, respectively, as a result of improved credit and collection
efforts. The overall decrease was due to a decrease in the uncollectible
accounts associated with our former IA products and services.
Depreciation and Amortization. We recorded depreciation and amortization of $2.8
million for the year ended December 31, 2001, compared to $5.9 million for the
year ended December 31, 2000. Of the decrease, $0.7 million and $3.0 million
relate to a decrease in the amortization of goodwill for our CE and IA
businesses, respectively, both of which were sold in March 2001. Offsetting
these decreases was the full year impact of goodwill amortization from our Cinax
acquisition in August 2000, of $0.7 million. The balance of intangible assets
and goodwill from this acquisition of $2.2 million was recorded as an impairment
charge in December 2001.
32
Impairment charges. Impairment charges for the year ending December 31, 2001
totaling $3.9 million, include a charge for an acquired Intel technology
license, valued at $1.7 million, as well as charges for the identified
intangible assets and goodwill remaining from the Cinax acquisition totaling
approximately $2.2 million. Both the acquired technology rights and Cinax
identified intangible assets and goodwill were deemed to be impaired based upon
various factors including the projected cash flows expected from the use of the
assets and their eventual disposition, as well as our strategic shift to
becoming an enterprise software and services company. The impairment charge for
the year ending December 31, 2000 includes a $2.8 million charge for the
write-off of capitalized distribution rights obtained in connection with a
warrant issued pursuant to a distribution rights agreement, in June 2000, to
acquire 1.5 million shares of our common stock.
Gains on Sales of Assets. We recorded a gain of approximately $47.5 million for
the year ended December 31, 2001 as a result of the sale of the assets related
to our CE business in March 2001. We recorded a gain of approximately $4.5
million for the year ended December 31, 2001 as a result of the sale of assets
related to our IA business in March 2001.
Interest Income and (Expense), Net. Net interest income and expense decreased by
$0.04 million, or 2%, for the year ended December 31, 2001 compared to the
comparable period in 2000. The decrease is the result of lower bank interest
rates in 2001.
Provision for Income Taxes. Income tax expense recorded for 2001 is attributable
to the gains on sales of assets described above, offset by the operating losses.
33
Quarterly Results of Operations
The following table presents certain unaudited quarterly consolidated statements
of operations data for the eight quarters ended December 31, 2002. In the
opinion of management, this information has been presented on the same basis as
the audited consolidated financial statements appearing elsewhere in this Annual
Report, and all necessary adjustments have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in conjunction
with our audited consolidated financial statements included at Item 8 herein.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire year or for any future period.
Mar. 31, Jun. 30, Sept. 30, Dec. 31,
2001 2001 2001 2001
------------ ------------ ------------ -------------
(In thousands, except share and per share data)
-----------------------------------------------
Revenues:
License ........................ $ 2,363 $ 673 $ 571 $ 2,429
Services and maintenance ....... 407 -- -- 35
Hardware ....................... 46 121 270 674
------------ ------------ ------------ ------------
Total revenues ..................... 2,816 794 841 3,138
------------ ------------ ------------ ------------
Cost of revenues:
License ........................ 523 432 207 467
Services and maintenance ....... 94 -- -- 129
Hardware ....................... 37 104 303 678
Software amortization ....... -- -- -- 171
Inventory charges ........... -- 13,420 -- 5,082
------------ ------------ ------------ ------------
Total cost of revenues ............. 654 13,956 510 6,527
------------ ------------ ------------ ------------
Gross profit ....................... 2,162 (13,162) 331 (3,389)
Research and development (R&D)
Non-cash compensation .......... 1,738 116 228 18
Other R&D expense .............. 2,407 999 1,084 1,201
Sales and marketing (S&M)
Non-cash compensation and other
expense ........................ 69 -- 18 60
Other S&M expense .............. 3,492 842 1,075 2,261
General and administrative (G&A)
Non-cash compensation .......... 64 48 275 393
Other G&A expense .............. 2,289 1,588 2,620 3,363
Provision for doubtful
accounts (net of recoveries) .. 126 658 -- 145
Depreciation and amortization ...... 1,666 389 358 431
Impairment charges ................. -- -- -- 3,916
Special charges .................... -- -- -- --
Acquired in-process research and
development ....................... -- -- -- 3,112
------------ ------------ ------------ ------------
Operating loss ..................... (9,689) (17,802) (5,327) (18,289)
Gains (losses) on disposals of
assets ............................ 52,037 -- -- --
Interest income (expense), net ..... 366 681 520 186
Other income (expense),net ......... -- -- -- (133)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes (benefit) ............. 42,714 (17,121) (4,807) (18,236)
Provision for income taxes (benefit) 2,979 (1,171) (685) --
------------ ------------ ------------ ------------
Net income (loss) .................. $ 39,735 $ (15,950) $ (4,122) $ (18,236)
============ ============ ============ ============
Basic net income (loss) per weighted
average common share outstanding ... $ 2.28 $ (0.89) $ (0.22) $ (0.87)
============ ============ ============ ============
Diluted net income (loss) per
weighted average common share
outstanding ........................ $ 2.14 $ (0.89) $ (0.22) $ (0.87)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic ........ 17,415,045 17,840,876 18,720,363 20,916,050
============ ============ ============ ============
Weighted average number of common
shares outstanding - diluted ....... 18,582,846 17,840,876 18,720,363 20,916,050
============ ============ ============ ============
34
Quarterly Results of Operations (continued)
Mar. 31, Jun. 30, Sept. 30, Dec. 31,
2002 2002 2002 2002
---------- ----------- --------- --------
(In thousands, except share and per share data)
-----------------------------------------------
Revenues:
License ........................ $ 3,040 $ 2,578 $ 3,421 $ 3,733
Services and maintenance ....... 543 674 795 1,112
Hardware ....................... 1,057 291 153 732
---------- ----------- --------- --------
Total revenues ..................... 4,640 3,543 4,369 5,577
---------- ----------- --------- --------
Cost of revenues:
License ........................ 1,035 782 579 453
Services and maintenance ....... 717 990 1,163 1,340
Hardware ....................... 1,009 243 29 7
Software amortization ....... 529 525 525 364
Inventory charges ........... -- -- -- --
---------- ----------- --------- --------
Total cost of revenues ............. 3,290 2,540 2,296 2,164
---------- ----------- --------- --------
Gross profit ....................... 1,350 1,003 2,073 3,413
Research and development (R&D)
Non-cash compensation .......... 64 34 31 34
Other R&D expense .............. 2,232 2,090 1,655 1,185
Sales and marketing (S&M)
Non-cash compensation and other
expense ........................ 19 19 17 16
Other S&M expense .............. 4,802 4,990 3,836 3,014
General and administrative (G&A)
Non-cash compensation .......... 860 239 103 102
Other G&A expense .............. 3,018 3,076 2,401 2,505
Provision for doubtful
accounts (net of recoveries) .. 45 (67) (27) 4
Depreciation and amortization ...... 310 330 422 490
Impairment charges ................. -- -- -- 22,413
Special charges .................... -- 820 -- --
Acquired in-process research and
development ........................ -- -- -- --
---------- ----------- --------- --------
Operating loss ..................... (10,000) (10,528) (6,365) (26,350)
Gains (losses) on disposals of
assets ............................. -- (37) (86) (15)
Interest income (expense), net ..... 220 93 93 35
Other income (expense),net ......... -- (3) 47 510
---------- ----------- --------- --------
Income (loss) before provision for
income taxes (benefit) ............. (9,780) (10,475) (6,311) (25,820)
Provision for income taxes (benefit) (668) -- -- 209
---------- ----------- --------- --------
Net income (loss) .................. $ (9,112) $ (10,475) $ (6,311) $ (26,029)
============ ============ ============ ========
Basic net income (loss) per weighted
average common share outstanding ... $ (0.34) $ (0.39) $ (0.23) $ (0.96)
============ ============ ============ ============
Diluted net income (loss) per
weighted average common share
outstanding ........................ $ (0.34) $ (0.39) $ (0.23) $ (0.96)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic ......... 26,789,174 26,986,387 27,222,368 27,250,263
============ ============ ============ ============
Weighted average number of common
shares outstanding - diluted ....... 26,789,174 26,986,387 27,222,368 27,250,263
============ ============ ============ ============
35
Axeda Systems Inc.
Management Discussion
Acquired In-Process Research and Development
In connection with the acquisition of eMation in December 2001, we expensed $3.1
million of the purchase price as IPR&D. The potential income streams were
discounted using a 15%-25% discount rate for risks, probabilities and
uncertainties, including the stage of development of the technology, viability
of target markets, and other factors.
As of the acquisition date, eMation was conducting ongoing research and
development into its next generation DRM product, as well as enhancing its
WizFactory and @aGlance industrial DRM products. Due to the significant
technological risks relating to the development of these products and the fact
that the products were not completed at the time of the acquisition, the work
effort estimated to bring these products to market was considered in-process
research and development. These development efforts were expected to include
product enhancements to enable the products to perform on an increased number of
platforms. In September 2002, we completed the next generation DRM product,
Axeda DRM 3. Release 3 expanded the diagnosis and repair, reporting,
performance, connectivity and security features of the Axeda DRM system. Also in
September 2002, we completed the new Windows XP version of our industrial
automation solution, Wizcon, version 8.2, supervisory control and data
acquisition (SCADA) system. These products, along with any related services and
maintenance, are expected to generate revenues through at least 2004.
In August 2000, we completed the acquisition of Cinax Designs Inc. The
acquisition of Cinax was recorded under the purchase method of accounting. A
portion of the purchase price was allocated to IPR&D, which resulted in a charge
of $1.4 million to our operations in August 2000. As of the acquisition date,
Cinax was conducting ongoing research and development into new products in the
form of two projects, including enhancements to the existing products previously
developed by Cinax. At the date of acquisition, these projects had not reached
technological feasibility and there was no alternative future use for them.
36
LIQUIDITY AND CAPITAL RESOURCES
We financed our operations up until 2001 primarily through the issuance and sale
of debt and equity securities to investors including our initial public offering
completed on July 16, 1999. Since March 2001, our operations have also been
financed through the sales of the assets of our CE and IA businesses. As of
December 31, 2002, we had approximately $19.1 million in cash and cash
equivalents, including $0.55 million of the proceeds from the sales of the
assets of our IA businesses in March 2001 which are currently held in escrow by
third parties pending the settlement of a claim submitted by Phoenix. The
parties are currently in settlement discussions.
Net cash used in operating activities for the year ending December 31, 2002 was
$23.9 million. Cash used in operating activities for this period was primarily
the result of our net loss of approximately $(51.9) million, adjusted for other
non-cash charges, including an impairment charge of $22.4 million, non-cash
compensation and depreciation and amortization totaling approximately $5.0
million, losses on disposals of assets totaling approximately $0.5 million and
other changes in working capital of approximately $0.1 million. Net cash used in
operating activities for the year ending December 31, 2001 was $30.5 million.
Cash used in operating activities for this period was primarily the result of
net income, adjusted for non-recurring gains of approximately $52.0 million and
non-cash compensation expense and depreciation and amortization totaling
approximately $5.6 million.
Net cash used in investing activities for the year ending December 31, 2002 was
$2.3 million, and consisted of purchases of leasehold improvements, furniture
and equipment primarily for our Mansfield, Massachusetts facility. Net cash
provided by investing activities for the year ending December 31, 2001 was
approximately $68.1 million and consisted primarily of the net proceeds from the
sales of the assets of our CE and IA businesses.
In March 2001, we completed the sale of the assets of our CE business to
STMicroelectronics and received approximately $55.6 million in cash, and sold
the assets of our IA business, excluding inventory, to Phoenix Technologies for
$18.0 million in cash, of which $0.55 million remains held by a third party
escrow agent pending the settlement of a claim submitted by Phoenix.
Net cash used in financing activities was $2.0 million for the year ending
December 31, 2002 and consisted of the repayment of the balance of $1.65 million
under the line of credit acquired in the acquisition of eMation and principal
payments of the equipment line of credit to European Venture Partners, or EVP,
of approximately $0.4 million. Net cash used in financing activities was nominal
for the period ending December 31, 2001. During this period, cash provided by
financing activities of $1.5 million from the exercise of stock options was
offset by cash used in financing activities for the repurchase of the Company's
common stock of $0.6 million and the repayment of a bridge loan of $0.8 million
in connection with the acquisition of eMation.
As of December 31, 2002, we had approximately $0.3 million outstanding on an
equipment line of credit with EVP with interest rates ranging from 12% to 13%
and payments due monthly over a 36 month period ending in December 2003. The
line of credit was available to finance purchases of capital equipment until
December 31, 2001. In connection with the agreement, EVP has a senior security
interest in substantially all of eMation's capital equipment. In addition, the
line of credit agreement requires us to provide EVP with copies of quarterly
financial statements within 45 days of the end of each quarter and audited
annual financial statements within 90 days of the end of each year as well as
other information and notifications regarding eMation's financial and operating
results. As of December 31, 2002, we were in compliance with all of our
covenants to EVP.
A portion of our liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment, as of the balance sheet date. Employees in
Israel are entitled to one month's salary for each year of employment or a
portion thereof. The liability for all of our Israeli employees is fully
provided by monthly deposits with insurance policies and by an accrual, totaling
approximately $0.4 million. The aggregate value of these policies is
approximately $0.3 million. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds is based upon the cash surrender
value of these policies.
In May 2002, we entered into a sublease for approximately 35,000 square feet of
space in an office building in the same business park as our current offices
located in Mansfield, Massachusetts. This facility is leased at an annual rental
of approximately $0.3 million, plus operating expenses, utilities and taxes, and
is used for research and development, sales and support and administrative
activities. The sublease commenced in June 2002, expires in July 2007, and
provided for free rent through September 2002. We recorded the net lease expense
on a straight-line basis over the term of the sublease. Axeda obtained an
irrevocable, cash-secured, standby letter of credit (the "letter of credit")
from a bank as security and for the benefit of the lessor for $0.15 million. The
letter of credit expires in August 2003 and provides for automatic one-year
renewals, but not beyond August 2007. The letter of credit is secured by a
certificate of deposit for $0.15 million from the same bank, and also expires in
August 2003. This amount is restricted for withdrawal and is included in other
assets (non-current) in our consolidated balance sheets. We completed our
37
occupancy of the new office in July 2002. In September 2002, we entered into a
sublease with a subtenant (the "Subtenant") for the balance of the term of the
lease for our former office. The lease for our former office expires in July
2004 and requires us to pay minimum future rental payments totaling
approximately $0.5 million as of December 31, 2002. Under the terms of the
sublease agreement, we will receive minimum future rental payments totaling
approximately $0.3 million from the Subtenant as of December 31, 2002. For the
year ending December 31, 2002, we recorded a charge of approximately $0.2
million, which is included in other general and administrative expense, for the
amount representing the excess of the future minimum rental payments to be made
over the future minimum sublease payments to be received.
In June 2002 we entered into a Software License Agreement with a vendor to
provide server and client software that, beginning in August 2002, is
incorporated into our DRM Enterprise Server products. License fees are due and
payable at the rate of 2.5% of each billable sale, as defined. Under the
agreement, we agreed to pay a minimum, non-refundable license fee of $0.4
million, which is payable in installments. We paid $0.1 million in July 2002,
and are required to pay $0.1 million on June 30, 2003 and the remaining $0.2
million on December 15, 2003.
We maintain approximately 9,000 square feet of office space in Marlborough,
Massachusetts under an operating lease, which is no longer used for operating
purposes. The lease requires annual rental payments totaling approximately $0.2
million and expires in February 2009. The present value of the future lease
payments, discounted at 5%, of approximately $1.2 million was accrued by eMation
as of the date of acquisition and the unpaid balance as of December 31, 2002 is
approximately $1.0 million.
During the second quarter of 2002 we initiated cost reduction actions, which
reduced our cash operating expenses by approximately one third of our second
quarter 2002 rate. These reductions centered on selling and marketing and
general and administrative expenses, and in areas not core to our DRM solutions
growth. We have also reduced the number of global offices and closely monitored
our infrastructure costs. We incurred $1.0 million in charges during the third
quarter of 2002 to reduce staffing levels and to terminate certain leases. We
incurred $0.6 million in charges during the fourth quarter of 2002 for severance
and other activities relating to our office relocation. We expect to incur
additional charges ranging from $0.6 - $0.8 million in the first quarter of 2003
to decrease our expense levels in future periods. We will continue to evaluate
our cost structure and may undertake additional measures to reduce expenses in
the future.
We have no other material commitments for capital expenditures, and we
anticipate minimal spending in our capital expenditures as our needs in
operations, infrastructure and personnel arise.
In September 2001, our Board of Directors authorized a stock repurchase program
to acquire up to $10 million worth of shares of our common stock for a one-year
period, which expired in September 2002. From September 2001 to December 2001,
we repurchased 383,800 shares for an aggregate cost of approximately $0.6
million including commissions, at an average market price per share of
approximately $1.58. No shares were repurchased under the program in the year
ending December 31, 2002.
We believe that our current cash and cash equivalents balance will be adequate
to meet our cash needs through at least 2003. Although our current business plan
does not foresee the need for further financing to fund our operations for the
next year, due to risks and uncertainties in the market place, we may need to
raise additional capital.
38
CRITICAL ACCOUNTING POLICIES
In December 2001 the SEC issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and results,
and requires significant judgment and estimates on the part of management in its
application. We believe the following represent our critical accounting policies
as contemplated by FRR 60. For a summary of all of our significant accounting
policies, including the critical accounting policies discussed below, see note 1
to the accompanying consolidated financial statements filed herewith at Item 8.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue recognition. We derive our revenues from primarily two sources (i)
product revenues, which includes software license, royalties and hardware
revenues, and (ii) services and support revenues, which includes professional
services, software license maintenance, training, and consulting revenues. As
described below, significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period if our management made different judgments or utilized different
estimates.
We generally license our software products on a perpetual basis. Some of our
licenses include maintenance and support, which typically are for renewable
periods of one year.
We apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," ("SOP 97-2") as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9") to all transactions involving the sale of software
products. For hardware transactions where no software is involved, we apply the
provisions of Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB 101").
We recognize revenue from the sale of software licenses when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured.
Delivery generally occurs when product is delivered to a common carrier. If a
significant portion of a fee is due after our normal payment terms, we account
for the fee as not being fixed and determinable. In these cases, we recognize
revenue as the fees become due.
We assess collection based on a number of factors, including the transaction
history and the credit-worthiness of the customer. If we determine that
collection of a fee is not reasonably assured, we defer the fee and recognize
revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash.
For all sales we use either a binding purchase order or a signed agreement as
evidence of an arrangement. Sales through our distributors are evidenced by a
master agreement governing the relationship together with binding purchase
orders on a transaction-by-transaction basis.
For multiple-element arrangements that are not accounted for using long-term
contract accounting (for example, undelivered maintenance and support), we
allocate revenue to the delivered elements of the arrangement using the residual
value method when there is vendor specific objective evidence, or VSOE, for each
of the undelivered elements. We defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements and the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. The fair
value of DRM maintenance and postcontract customer support or PCS obligations is
based upon separate sales of renewals to other customers or upon renewal rates
quoted in the contracts. The fair value of DRM services, such as training or
consulting, is based upon separate sales by us of these services to other
customers.
Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes an acceptance provision, acceptance occurs upon the earlier
of receipt of a written customer acceptance or expiration of the acceptance
period.
In cases where we engage a third party warehouse or distributor to sell any of
our inventory from our former IA business on consignment, and collectibility is
not probable, revenue is not recognized and inventory is not reduced until cash
from the sale is received. In certain consignment arrangements with
distributors, if the period under which a right to return has expired with no
physical return of the inventory, the inventory is considered sold, assuming all
other criteria in SAB 101 are met.
We recognize revenues for maintenance services ratably over the contract term.
Our training and professional services are billed based on hourly or daily
rates, and we generally recognize revenues as these services are performed.
However, if our services are bundled with a license component and the
arrangement requires us to perform significant work, such as altering the
underlying software or building additional, complex interfaces so that the
39
software conforms to the customer's requirements, we recognize the entire fee
using the percentage of completion method. We estimate the percentage of
completion based on the costs incurred to date as a percentage of the estimated
total costs to complete the project. For arrangements that include services
that, under SOP 97-2, qualify for separate accounting, we follow the provisions
of SOP 97-2 and allocate revenues to the services element based on VSOE and
recognize the revenues as the services are performed. During our analysis, if
the work effort to complete a project exceeds our revenue projections, a loss on
the project is immediately recognized.
Provision for doubtful accounts. Management must make estimates of the
collectibility of our accounts receivables. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $3.3 million, net of allowance for
doubtful accounts of $0.1 million as of December 31, 2002.
Valuation of inventories. We previously assessed the value of our inventories on
a periodic basis based upon numerous factors including expected product or
material demand, current market conditions, technological obsolescence, current
cost and net realizable value. In cases where any of these factors adversely
affected our ability to realize the carrying value of our inventories, an
inventory reserve was recorded. As of December 31, 2002, our inventories, which
relate primarily to our former IA business, are fully reserved.
Valuation of long-lived assets and intangible assets with finite lives, and
goodwill. On January 1, 2002, we adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes
certain provisions of APB Opinion No. 30 "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), and
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). There was no adjustment
required upon adoption of SFAS 144. In accordance with SFAS 144, we evaluate
long-lived assets, including intangible assets other than goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable based on expected undiscounted
cash flows attributable to that asset. The amount of any impairment is measured
as the difference between the carrying value and the fair value of the impaired
asset.
Factors we consider important which could trigger an impairment review include
the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o significant negative industry or economic trends; and
o significant decline in our stock price for a sustained period; and
our market capitalization relative to net book value.
During November 2002 we completed our annual impairment test under SFAS 142
concerning the valuation of our goodwill. Based upon the results of the first
step impairment indicators as described in SFAS 142, we tested our identified
intangible assets for impairment under SFAS 144. Using our latest forecast data
and with the assistance an independent, national valuation firm, we performed a
fair market value analysis on our reporting unit. Due to adverse market
conditions and a slower than expected rate of adoption of our software
technology in our industry, we determined that the fair value of our reporting
unit could not support the carrying value of its intangible assets and,
accordingly, recognized goodwill and identified intangible asset impairment
charges totaling approximately $22.4 million in 2002. If our estimates or
related assumptions change again in the future, we may be required to record
additional impairment charges in accordance with SFAS 142 and SFAS 144.
Contingencies. Management's current estimated range of liability related to our
pending legal claims is based on claims for which management can estimate the
amount or range of loss. We have accrued for estimated losses in the
accompanying consolidated financial statements for those matters where we
believe the likelihood of an adverse outcome is probable and the amount of the
loss is reasonably estimable. Because of the uncertainties related to both the
amount and range of loss on the remaining pending legal claims, management is
unable to make a reasonable estimate of the liability that could result from an
unfavorable outcome. As additional information becomes available, we will assess
the potential liability related to our pending legal claims and revise our
estimates. Such revisions in our estimates of the potential liability could
materially impact our results of operations, financial position and cash flows.
Income Taxes. The relative proportions of our domestic and foreign revenue and
income directly affect our effective tax rate. We are also subject to changing
tax laws in the multiple jurisdictions in which we operate. We have recorded a
valuation allowance for our entire deferred tax asset balance due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward, before
they expire. The valuation allowance is based on our estimates of taxable income
by jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable.
40
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31,
2002 (in thousands):
Payments Due By Period
Less than 1 More than 5
Contractual obligation Total year 1-3 years 3-5 years years
- ------------------------------------ ------------ ----------- --------- ------------ -------------
Long-term debt obligation ........... $ 252 $ 252 $ -- $ -- $--
Capital lease obligation ............ -- -- -- -- --
Operating lease obligations ......... 5,751 1,628 1,943 1,207 973
Purchase obligations ................ 2,127 2,127 -- -- --
Other long-term liabilities reflected
on the Registrant's balance sheet
under GAAP ......................... -- -- -- -- --
------- ------- ------ ------- ------
Total .......................... $8,130 $4,007 $1,943 $1,207 $973
====== ====== ====== ====== ====
A "purchase obligation" is defined as an agreement to purchase goods or services
that is enforceable and legally binding on the registrant and that specifies all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the
transaction.
41
Employee and Director Stock Options
Section I. Option Program Description
Refer to note 15a for the summaries of the terms of our stock option plans (the
"Plans").
Section II. Distribution and Dilutive Effect of Options
The table below provides information about stock options granted for 2002
and 2001 to our Chief Executive Officer and our three other executive officers
as of December 31, 2002, who will also be identified in our 2003 Proxy
Statement. This group is referred to as the Named Executive Officers. Please
refer to the section headed "Executive Options" below for the Named Executive
Officers.
Options granted to Named Executive Officers for 2001 and 2002 are
summarized as follows:
As of December 31,
2002 2001**
----- -----
Net grants during the period as % of outstanding shares (#).. 9.17% 11.18%
Grants to named executive officers* during the period
as a % of total options granted (%) ........................13.82% 49.72%
Grants to named executive officers* during the period
as a % of outstanding shares granted (%) ................... 1.27% 5.56%
Cumulative options held by named executive officers*
as % of totaloptions outstanding (%) ...................... 40.90% 38.09%
* See section IV for named executive officers; these are our CEO and our three
other executive officers.
** The grants made during 2001 include 681,000 options granted to our CEO upon
joining Axeda.
Section III. General Option Information
The following table sets forth the summary of activity under the Plans for
our years ended December 31, 2002 and 2001:
Options Outstanding
-------------------------------------
Number of Shares Number of Shares Weighted Average
Available for Shares Exercise Price
Options (per share)
December 31, 2000 .................... 724,718 3,055,318 $5.69
Grants ............................... (1,600,300) 1,600,300 1.07
Options assumed in acquisition ....... -- 1,428,710 1.35
Exercises ............................ -- (1,167,132) 1.35
Cancellations* ....................... 1,125,051 (1,135,604) 9.53
Additional shares reserved ........... 521,832 N/A
----------- -----------
December 31, 2001 .................... 771,301 3,781,592 $2.43
Grants ............................... (2,533,700) 2,533,700 1.63
Exercises ............................ -- (207,331) 0.26
Cancellations* ....................... 925,823 (1,029,142) 3.27
Additional shares reserved ........... 1,100,000 N/A
----------- -----------
December 31, 2002 .................... 263,424 5,078,819 $1.95
========= =========
* The "Number of Shares Available for Options" does not include options
under assumed plans exercisable for 103,319 and 10,553 shares that were
cancelled during 2002 and 2001, respectively, as no options will be granted in
the future pursuant to these assumed plans.
42
The following table sets forth a comparison, as of December 31, 2002, of
the number of shares subject to our options whose exercise prices were at or
below the closing price of our common stock on December 31, 2002 ("In-the-Money"
options) to the number of shares subject to options whose exercise prices were
greater than the closing price of our common stock on such date
("Out-of-the-Money" options):
Exercisable Unexercisable Total
-------------------------- -------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
In-the-money ................... 738,640 $ 0.01 1,056,564 $ 0.28 1,795,204 $ 0.17
Out-of-the-money (1) ........... 1,376,756 $ 4.13 1,906,859 $ 2.04 3,283,615 $ 2.92
Total options outstanding ...... 2,115,396 $ 2.69 2,963,423 $ 1.41 5,078,819 $ 1.95
(1) Out-of-the-money options are those options with an exercise price equal to
or above the closing price of $0.80 as of December 31, 2002.
Section IV. Executive Options
The following table sets forth information regarding stock options granted
in the year ended December 31, 2002, to our Named Executive Officers, each
underour 1999 Stock Option Plan, as amended. All options were granted with an
exercise price equal to the closing price of our common stock on the date of
grant. Potential realizable values are net of exercise price, but before taxes
associated with exercise. These amounts represent hypothetical gains that could
be achieved for the options if exercised at the end of the option term of ten
(10) years. The assumed 5% and 10% rates of stock price appreciation are
provided for purposes of illustration only and do not represent our estimate or
projection of the future price of our common stock.
Number of Percentage of Potential Realizable Value at
Securities Total Options Exercise Assumed Annual Rates of Stock
Underlying Option Granted to Price (Per Expiration Price Appreciation for
Name* Per Grant Employees** Share) Date Option Terms
- --------------------- ----------------- ------------ ---------- ---------- -------------------------------
5% 10%
---------- ---------
Robert M. Russell Jr ....... 100,000 3.95% $ 2.60 06/20/11 $184,688 $481,810
....... 100,000 3.95 0.43 10/07/12 30,545 79,684
Dale E. Calder ............ 75,000 1.47 0.43 10/07/12 22,908 59,763
Thomas J. Fogarty ......... 75,000 1.47 0.43 10/07/12 22,908 59,763
Ned E. Barlas ............. 40,000 0.79 0.43 10/07/12 12,218 31,874
*The definition of "named executive officers" here is the same definition
used in our proxy statement: our CEO and our three other executive officers.
**Based on a year-to-date total of 2,533,000 shares subject to options
granted to employees under our option plans.
43
The following table shows stock options exercised by the Named Executive
Officers in 2002, if any, including the total value of gains on the date of
exercise based on actual sale prices or on the closing price that day if the
shares were not sold that day, in each case less the exercise price of the stock
options. In addition, the number of shares covered by both exercisable and
non-exercisable stock options, as of December 31, 2002, is shown. Also reported
are the values for "In-the-Money" options. The dollar amounts shown in the
"In-the-Money" column represent the positive spread between the exercise price
of any such existing stock options and closing price as of December 31, 2002 of
our common stock.
Number of Securities Underlying Values of Unexercised
Number of Shares Unexercised Options In-the-Money Options**
Acquired on Realized --------------------------------- -----------------------------
Name* Exercise Value Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------------- ---------- --------------- -------------- ----------- -------------
Robert M. Russell - $ - 255,832 625,168 $114,666 $ 310,134
Dale Calder - - 312,500 262,500 150,000 150,000
Thomas J. Fogarty - - 189,166 140,834 100,000 60,000
Ned Barlas - - 104,164 67,669 42,000 32,000
*The definition of "listed officers" here is the same definition used in the
proxy statement: our CEO and our three other executive officers.
** Option Values based on stock price of $0.80 on December 31, 2002.
Section V. Equity Compensation Plan Information
The following table gives information about our common stock that may be
issued upon the exercise of options under all of our existing equity
compensation plans as of December 31, 2002:
(1) (2) (3)
Number of Securities
Weighted-Average Remaining Available for
Number of Securities Exercise Price of Future Issuance Under
to be Issued upon Outstanding Options, Equity Compensation
Exercise of Warrants, and Rights Plans (Excluding
Outstanding Options, (per share) Securities Reflected in
Plan Category Warrants, and Rights Column (1)
- ------------- -------------------- -------------------- ------------------------
Equity Compensation Plan
Approved by Shareholders ....... 3,753,428 $ 2.17 259,575
Equity Compensation Plan
Not Approved by
Shareholders (A) ............... 1,325,391 $ 1.30 --
--------- -------- --------
Total .......................... 5,078,819 $ 1.95 259,575
========= ======== =======
(A) On December 7, 2001, we acquired all of the outstanding shares of
eMation, Ltd., a private company organized under the laws of the State of
Israel, pursuant to a share purchase agreement amended and restated as of
October 5, 2001. In connection with such acquisition, we assumed options issued
under eMation, Ltd.'s 2001 Stock Option Plan that became exercisable for up to
1,428,710 shares of our common stock, 530,000 of which are exercisable for $0.01
per share and the remaining 898,710 exercisable at $2.14 per share. No options
have been or will be granted under the eMation, Ltd. 2001 Stock Option Plan
subsequent to our acquisition of eMation, Ltd.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in note 1q to
the consolidated financial statements included at Item 8 herein.
44
ITEM 7a.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell such products in North
America, Asia and various countries in Europe. We collect a portion of our
revenues and pay a portion of our operating expenses in foreign currencies. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Currently, we do not use derivative instruments to hedge our foreign exchange
risk, although we may do so in the future. Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.
45
ITEM 8.
Financial Statements and Supplementary Data
Consolidated Financial Statements Page
Axeda Systems Inc.
Independent Auditors' Report .................................................................. 47
Consolidated Balance Sheets, December 31, 2002 and 2001 ....................................... 48
Consolidated Statements of Operations, Years ended December 31, 2002, 2001, and 2000 ........... 49
Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 2002, 2001,
and 2000 ...................................................................................... 50
Consolidated Statements of Cash Flows, Years ended December 31, 2002, 2001, and 2000 ........... 52
Notes to the Consolidated Financial Statements ................................................. 53
46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Axeda Systems Inc.:
We have audited the accompanying consolidated balance sheets of Axeda
Systems Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 provide 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 Axeda
Systems Inc. and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, Axeda
Systems Inc. adopted Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002.
KPMG LLP
Philadelphia, Pennsylvania
February 3, 2003
47
AXEDA SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
-------------------------------
2002 2001
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents, including restricted
cash of $650 in 2002 and $2,549 in 2001 ..................................... $ 19,065 $ 47,349
Accounts receivable, net of provision for doubtful
accounts of $84 in 2002 and $179 in 2001 ..................................... 3,305 4,623
Inventories, net .............................................................. -- 2,070
Prepaid expenses .............................................................. 546 934
Other current assets .......................................................... 427 719
--------- ---------
Total current assets ...................................................... 23,343 55,695
Furniture and equipment, net .................................................. 3,111 2,567
Goodwill ...................................................................... 3,651 20,819
Identified intangible assets, net of accumulated
amortization of $73 in 2002 and $192 in 2001 ................................ 2,087 9,553
Other assets .................................................................. 321 472
--------- ---------
Total assets .............................................................. $ 32,513 $ 89,106
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable .............................................. $ 238 $ 2,149
Accounts payable .............................................................. 2,448 5,047
Accrued expenses .............................................................. 8,015 8,928
Income taxes payable .......................................................... 616 1,075
Deferred revenue .............................................................. 1,078 926
--------- ---------
Total current liabilities ................................................. 12,395 18,125
Non-current liabilities:
Notes payable, less current portion ........................................... 14 187
Other non-current liabilities ................................................. 1,032 1,428
--------- ---------
Total liabilities ........................................................... 13,441 19,740
--------- ---------
Commitments and contingencies (note 16)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized in 2002 and
2001, none issued or outstanding ............................................. -- --
Common stock, $.001 par value 50,000,000 shares authorized; 27,822,217
shares issued in 2002 and 27,274,962 shares issued in 2001 ................... 28 27
Additional paid-in capital .................................................... 143,847 143,454
Deferred stock compensation ................................................... (578) (1,842)
Accumulated deficit ........................................................... (122,880) (70,953)
Accumulated other comprehensive income ........................................ 35 21
Treasury stock at cost, 603,800 shares in 2002 and 583,800 shares in 2001 ..... (1,380) (1,341)
--------- ---------
Total stockholders' equity ................................................ 19,072 69,366
--------- ---------
Total liabilities and stockholders' equity................................$ 32,513 $ 89,106
========= =========
See accompanying notes to consolidated financial statements.
48
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
December 31,
-------------------------------------------
2002 2001 2000
--------------- ------------- ------------
Revenues:
License ...................................................... $ 12,772 $ 6,036 $ 12,328
Services and maintenance ..................................... 3,124 442 1,898
Hardware ..................................................... 2,233 1,111 6,628
------------ ------------ ------------
Total revenues ................................................. 18,129 7,589 20,854
------------ ------------ ------------
Cost of revenues:
License ...................................................... 2,849 1,629 3,374
Services and maintenance ..................................... 4,210 223 733
Hardware .................................................. 1,288 1,122 6,189
Software amortization ..................................... 1,943 171 --
Inventory charges ............................................ -- 18,502 1,708
------------ ------------ ------------
Total cost of revenues ......................................... 10,290 21,647 12,004
------------ ------------ ------------
Gross profit ..................................................... 7,839 (14,058) 8,850
------------ ------------ ------------
Research and development
Non-cash compensation ........................................ 163 2,100 801
Other research and development expense ....................... 7,162 5,691 10,187
Sales and marketing
Non-cash compensation and other expense ...................... 71 147 3,480
Other selling and marketing expense .......................... 16,642 7,670 10,863
General and administrative
Non-cash compensation ........................................ 1,304 780 467
Other general and administrative expense ..................... 11,000 9,860 10,256
Provision for doubtful accounts (net of recoveries) ........ (45) 929 4,965
Depreciation and amortization .................................... 1,552 2,844 5,897
Special charges .................................................. 820 -- --
Impairment charges ............................................... 22,413 3,916 2,831
Acquired in-process research and development ..................... -- 3,112 1,373
------------ ------------ ------------
Total operating costs ............................................ 61,082 37,049 51,120
------------ ------------ ------------
Operating loss ................................................... (53,243) (51,107) (42,270)
Gains (losses) on disposals of assets ............................ (138) 52,037 --
Interest income (expense), net ................................... 441 1,753 1,792
Other income (expense), net ...................................... 554 (133) 51
------------ ------------ ------------
Income (loss) before provision for income taxes (benefit) ........ (52,386) 2,550 (40,427)
Provision for income taxes (benefit) ........................ (459) 1,123 40
------------ ------------ ------------
Net income (loss) ................................................ $ (51,927) $ 1,427 $ (40,467)
============ ============ ============
Basic net income (loss) per weighted average common share
outstanding ..................................................... $ (1.92) $ .08 $ (2.44)
============ ============ ============
Diluted net income (loss) per weighted average common share
outstanding ..................................................... $ (1.92) $ .07 $ (2.44)
============ ============ ============
Weighted average number of common shares outstanding used in
calculation of basic net income (loss) per common share .......... 27,063,751 18,559,185 16,606,795
============ ============ ============
Weighted average number of common shares outstanding used in
calculation of diluted net income (loss) per common share ....... 27,063,751 20,194,713 16,606,795
============ ============ ============
See accompanying notes to consolidated financial statements.
49
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
Additional Deferred
Common stock paid-in stock Accumulated
Shares Amount capital compensation deficit
------ ------ ------------ ------- -------------
Balances as of December 31, 1999 ................. 16,052,866 $16 $ 109,460 $(1,678) $ (31,913)
---------- --- --------- ------- ---------
Repayment of stock subscription
receivable ...................................... -- -- -- -- --
Issuance of common stock upon exercise of
exercise of options ............................. 888,272 1 1,040 -- --
Issuance of common stock upon exercise of
warrants ........................................ 405,298 -- 20 -- --
Deferred compensation related to stock
options ......................................... 33,647 -- 890 (758) --
Amortization of deferred stock
compensation .................................... -- -- -- 1,271 --
Issuance of equity securities to acquire
Cinax ........................................... 138,455 -- 3,725 (2,076) --
Issuance of warrants under distribution rights
agreement and other services .................... -- -- 5,724 -- --
Foreign currency translation
adjustment ...................................... -- -- -- -- --
Unrealized loss on available-for-sale
investment ...................................... -- -- -- -- --
Issuance of common stock for employee stock
purchase plan ................................... 75,891 -- 471 -- --
Net loss ......................................... -- -- -- -- (40,467)
---------- --- --------- ------- ---------
Balances as of December 31, 2000 ................. 17,594,429 $17 $ 121,330 $(3,241) $ (72,380)
---------- --- --------- ------- ---------
Issuance of common stock upon exercise of
options ......................................... 1,167,132 1 1,570 -- --
Issuance of common stock upon exercise of
warrants ........................................ -- -- 4 -- --
Issuance of common stock for employee stock
purchase plan ................................... 38,735 -- 86 -- --
Issuance of equity securities related to Cinax ... 474,666 1 14 344 --
Issuance of common stock to acquire eMation,
Ltd ............................................. 8,000,000 8 19,752 (847) --
Compensation related to stock options and warrants -- -- 698 549 --
Amortization of deferred stock
compensation .................................... -- -- -- 1,353 --
Repurchases of common stock ...................... -- -- -- -- --
Foreign currency translation
adjustment ...................................... -- -- -- -- --
Reclassification adjustment for available-for-sale
investment sold ................................. -- -- -- -- --
Net income ....................................... -- -- -- -- 1,427
---------- --- --------- ------- ---------
Balances as of December 31, 2001 ................. 27,274,962 $27 $ 143,454 $(1,842) $ (70,953)
---------- --- --------- ------- ---------
Issuance of common stock upon exercise of
options ......................................... 207,331 -- 53 -- --
Issuance of common stock for employee stock
purchase plan ................................... 68,085 -- 65 -- --
Issuance of equity securities related to Cinax
.. ................................................ 271,839 1 (1) -- --
Compensation related to stock options and warrants -- -- 276 45 --
Amortization of deferred stock
compensation .................................... -- -- -- 1,219 --
Common stock received as repayment of officer loan
receivable ...................................... -- -- -- -- --
Foreign currency translation
adjustment ...................................... -- -- -- -- --
Net loss ......................................... -- -- -- -- (51,927)
---------- --- --------- ------- ---------
Balances as of December 31, 2002 ................. 27,822,217 $28 $ 143,847 $ (578) $(122,880)
========== === ========= ======= =========
See accompanying notes to consolidated financial statements.
50
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
Accumulated Total
other stockholders' Comprehensive
comprehensive Treasury Note equity income
income (loss) stock receivable (deficiency) (loss)
-------------- ------------ ---------- ------------- ---------------
Balances as of December 31, 1999 ................. $ (80) $ (720) $ (500) $ 74,585 $ (8,126)
--------- ----- --------- ------- ---------
Repayment of stock subscription
receivable ...................................... -- -- 500 500 --
Issuance of common stock upon exercise of
exercise of options ............................. -- -- -- 1,041 --
Issuance of common stock upon exercise of
warrants ........................................ -- -- -- 20 --
Deferred compensation related to stock
options ......................................... -- -- -- 132 --
Amortization of deferred stock
compensation .................................... -- -- -- 1,271 --
Issuance of equity securities to acquire
Cinax ........................................... -- -- -- 1,649 --
Issuance of warrants under distribution rights
agreement and other services .................... -- -- -- 5,724 --
Foreign currency translation
adjustment ...................................... (11) -- -- (11) (11)
Unrealized loss on available-for-sale
investment ...................................... (87) -- -- (87) (87)
Issuance of common stock for employee stock
purchase plan ................................... -- -- -- 471 --
Net loss ......................................... -- -- -- (40,467) (40,467)
---------- --- --------- ------- ---------
Balances as of December 31, 2000 ................. $(178) $ (720) $-- $ 44,828 $(40,565)
---------- --- --------- ------- ---------
Issuance of common stock upon exercise of
options ......................................... -- -- -- 1,571 --
Issuance of common stock upon exercise of
warrants ........................................ -- -- -- 4 --
Issuance of common stock for employee stock
purchase plan ................................... -- -- -- 86 --
Issuance of equity securities related to Cinax ... -- -- -- 359 --
Issuance of common stock to acquire eMation,
Ltd ............................................. -- -- -- 18,913 --
Compensation related to stock options and warrants -- -- -- 1,247 --
Amortization of deferred stock
compensation .................................... -- -- -- 1,353 --
Repurchases of common stock ...................... -- (621) -- (621) --
Foreign currency translation
adjustment ...................................... 112 -- -- 112 112
Reclassification adjustment for available-for-sale
investment sold ................................. 87 -- -- 87 87
Net income ....................................... -- -- -- 1,427 1,427
--------- ------- ------- -------- --------
Balances as of December 31, 2001 ................. $ 21 $(1,341) $-- $ 69,366 $ 1,626
---------- -------- --------- ------- ---------
Issuance of common stock upon exercise of
options ......................................... -- -- -- 53 --
Issuance of common stock for employee stock
purchase plan ................................... -- -- -- 65 --
Issuance of equity securities related to Cinax
.. ................................................ -- -- -- -- --
Compensation related to stock options and warrants -- -- -- 321 --
Amortization of deferred stock
compensation .................................... -- -- -- 1,219 --
Common stock received as repayment of officer loan
receivable ...................................... -- (39) -- (39) --
Foreign currency translation
adjustment ...................................... 14 -- -- 14 14
Net loss ......................................... -- -- -- (51,927) (51,927)
----- ------- ------- -------- --------
Balances as of December 31, 2002 ................. $ 35 $(1,380) $ -- $ 19,072 $(51,913)
===== ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
51
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) ................................................ $(51,927) $ 1,427 $(40,467)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization .................................. 3,495 3,015 5,897
Impairment charges ............................................. 22,413 3,916 2,831
(Gains) losses on disposals of assets .......................... 472 (52,037) --
Non-cash compensation and other expenses ....................... 1,523 2,599 4,496
Provision for doubtful accounts (recoveries) ................... (97) 929 4,965
Provision for inventory ........................................ -- 18,783 --
Acquired in-process research and development .................. -- 3,112 1,373
Changes in items affecting operations (excluding the effects of
acquisitions and divestitures):
Accounts receivable ............................................ 1,415 2,252 4,822
Inventories .................................................... 2,070 (895) (19,560)
Loan receivable--officer ....................................... -- 494 (209)
Prepaid expenses and other current assets ...................... 680 (1,590) (220)
Other assets and intangible assets ............................. 35 572 152
Accounts payable ............................................... (2,439) (15,623) 4,980
Accrued expenses and other current and non-current liabilities . (1,266) 2,257 (1,205)
Income taxes payable ........................................... (459) 1,075 --
Deferred revenue ............................................... 152 (765) (3,186)
-------- -------- --------
Net cash used in operating activities .............................. (23,933) (30,479) (35,331)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (2,334) (505) (3,204)
Net proceeds from sales of assets ................................ -- 68,112 141
Acquisition, net of cash acquired ................................ -- 497 (2,763)
Proceeds from short-term investment .............................. -- -- 1,018
-------- -------- --------
Net cash provided by (used in) investing activities ................ (2,334) 68,104 (4,808)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options and warrants ......... 53 1,538 970
Repayments of long-term debt ..................................... (2,084) -- --
Repurchases of common stock ...................................... -- (621) --
Repayments under other liabilities ............................... -- (132) (441)
Repayment of shareholder bridge loan ............................. -- (750) --
Repayments under capital lease obligations ....................... -- (38) (40)
Note receivable .................................................. -- -- 500
-------- -------- --------
Net cash provided by (used in) financing activities ................ (2,031) (3) 989
Effect of exchange rate changes on cash and cash equivalents ....... 14 112 (11)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............... (28,284) 37,734 (39,161)
Cash and cash equivalents:
Beginning of period .............................................. 47,349 9,615 48,776
-------- -------- --------
End of period, including restricted cash of $650 in 2002,
$2,549 in 2001 and $1,806 in 2000 ............................. $ 19,065 $ 47,349 $ 9,615
======== ======== ========
See accompanying notes to consolidated financial statements.
52
Axeda Systems Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
a) Description of Business
Axeda Systems Inc. ("we", "our", "us" or "Axeda"), which changed its name
from RAVISENT Technologies Inc. in January 2002, develops, markets and sells
software products and services used by multiple industries and customers
worldwide for Device Relationship Management ("DRM"), to access and exploit
information hidden within remote machines, devices and facilities. We distribute
our DRM products through direct sales to original equipment manufacturers
("OEMs") and enterprise customers, as well as through distributors and
value-added resellers. We maintain regional sales and support offices for DRM in
the United States, Japan, France and Holland.
Prior to June 2002, we also designed, developed, licensed and marketed
core-based modular software solutions that enabled digital video and audio
stream management in personal computer ("PC") systems. Our PC solutions enabled
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk ("DVD"); direct broadcast satellite ("DBS") and
high-definition television ("HDTV") on existing personal computers. Our digital
video products customers consisted principally of PC and computer graphics card
OEMs. In May 2002 we entered into a Software Distribution Agreement (the
"Agreement") with Sonic IP, Inc. ("Sonic"), a wholly-owned subsidiary of Sonic
Solutions. As a result, we have exited the digital media market (note 6).
During 2002 our revenues were increasingly generated from selling DRM
products. In 2001 and 2000, our revenues were substantially generated from
selling digital video solutions and Internet Appliance ("IA") devices to PC,
Consumer Electronics ("CE"), and IA OEM's.
In December 2001 we purchased all of the outstanding capital stock of
eMation, Ltd., a private company organized under the laws of the State of Israel
and headquartered near Boston, Massachusetts. See note 4a, "Acquisitions," for
the description and accounting for the acquisition of eMation.
We have sustained significant net losses and negative cash flows from
operations since our inception. For the years ended December 31, 2002, 2001 and
2000, our net losses, excluding gains and losses on disposals of assets, were
$51.8 million, $50.6 million, and $40.5 million, respectively. There can be no
assurances that we will be able to generate sufficient revenues necessary to
achieve or sustain profitability in the short or long term. However, management
believes that the current cash and cash equivalent amounts will be sufficient to
sustain our operations through at least December 31, 2003.
b) Principles of Consolidation
The consolidated financial statements include our financial statements
and the financial statements of our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
c) Cash and Cash Equivalents
For purposes of the statement of cash flows, we consider all highly
liquid instruments purchased with an original maturity of three months or less
to be cash equivalents.
d) Inventories, net
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method (FIFO). Inventories, which are
fully reserved as of December 31, 2002, are net of reserves of approximately
$3.2 million and $21.3 million at December 31, 2002 and 2001, respectively.
53
Axeda Systems Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
e) Furniture and Equipment
Furniture and equipment is stated at cost. Equipment under capital
leases is stated at the lower of the present value of the minimum lease
payments or the fair value of the equipment. Depreciation and amortization
on furniture and equipment is calculated on the straight-line method over
the estimated useful lives of the assets. Equipment under capital leases is
amortized straight-line over the lease term or the estimated useful lives
of the assets. The estimated useful lives of the assets are as follows:
Purchased software ................. 3-5 years
Computer equipment ................. 3-5 years
Research and development equipment.. 5 years
Furniture and equipment ............ 7 years
f) Goodwill and Intangible Assets (Note 1g)
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that
the purchase method of accounting be used for all business combinations.
SFAS 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable to
an assembled workforce must be recognized and reported in goodwill. SFAS
142, which was effective January 1, 2002, requires that intangible assets
with indefinite useful lives should not be amortized until their lives are
determined to be finite and all other intangible assets with finite lives
must be amortized over their useful lives to their estimated residual
values. SFAS 142 also requires that goodwill not be amortized, but instead
be tested for impairment in accordance with the provisions of SFAS 142 at
least annually or between annual tests upon the occurrence of certain
events or upon certain changes in circumstances. Intangible assets with
finite useful lives are reviewed for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). See "Impairment of Long-lived Assets," below.
We adopted SFAS 141 in 2001. Effective July 1, 2001, we adopted
certain provisions of SFAS 142, as required in the transition guidance
contained therein, and adopted the remaining provisions on January 1, 2002.
There was not a cumulative transition adjustment upon adoption as of July
1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required us to perform
the following as of January 1, 2002: (i) review goodwill and intangible
assets for possible reclassifications; (ii) reassess the lives of
intangible assets; and (iii) perform a transitional goodwill impairment
test. We reviewed the balances of goodwill and identifiable intangible
assets and determined that we did not have any amounts that were required
to be reclassified from goodwill to identifiable intangible assets, or vice
versa. We also reviewed the useful lives of our identifiable intangible
assets and determined that the original estimated useful lives remain
appropriate. We completed the transitional goodwill impairment test and
determined that we did not have a transitional impairment of goodwill.
As required by SFAS 142, we have not amortized goodwill associated
with acquisitions completed after June 30, 2001 for any period presented
and ceased amortization of goodwill associated with acquisitions completed
prior to July 1, 2001, effective January 1, 2002. Prior to January 1, 2002,
we amortized goodwill associated with the pre-July 1, 2001 acquisitions
over four years using the straight-line method. Identifiable intangible
assets (acquired technology, patent applications and customer base) are
currently amortized over two or five years using the straight-line method.
We test goodwill for impairment in accordance with SFAS 142. SFAS 142
requires that goodwill be tested for impairment at the "reporting unit
level" ("Reporting Unit") at least annually and more frequently upon the
occurrence of certain events, as defined by SFAS 142. Goodwill is tested
for impairment annually, in the fourth quarter, in a two-step process.
First, we determine if the carrying amount of the Reporting Unit exceeds
the "fair value" of the Reporting Unit, which would indicate that goodwill
may be impaired. If we determine that goodwill may be impaired, we compare
the "implied fair value" of the goodwill, as defined by SFAS 142, to its
carrying amount to determine if there is an impairment loss. If the
carrying amount exceeds the implied fair value, we will record an
impairment charge for the excess, if any, but not in an amount in excess of
the carrying amount, in the period in which the determination of impairment
is made. Refer to notes 1g, 4, 7 and 8 for further discussion of
acquisitions, intangible assets and goodwill.
Goodwill represents the excess of cost over fair value of assets of
businesses acquired. In accordance with SFAS 142, approximately $3.7
million of goodwill acquired subsequent to June 30, 2001, in connection
with the acquisition of eMation, Ltd. (notes 1g and 4a), is not being
amortized. Also under SFAS 142, through December 31, 2001, all other
54
goodwill was amortized on a straight-line basis over the expected period to
be benefited, estimated at four years. Other identified intangible assets,
consisting of developed and core technology and customer base, are being
amortized on a straight-line basis over periods from two to five years.
Accumulated amortization at December 31, 2002 and 2001 was approximately
$73,000 and $192,000, respectively. Amortization expense was approximately
$2,177,000, $2,418,000, and $5,234,000 in 2002, 2001 and 2000,
respectively. See notes 1g, 4, 6 and 7 for further discussion of
acquisitions, acquired intangible assets and goodwill.
g) Impairment of Goodwill and Long-Lived Assets
On January 1, 2002, we adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes
certain provisions of APB Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), and supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"). There was no adjustment required upon adoption of SFAS
144. In accordance with SFAS 144, we evaluate long-lived assets, including
intangible assets other than goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may
not be recoverable based on expected undiscounted cash flows attributable
to that asset. The amount of any impairment is measured as the difference
between the carrying value and the fair value of the impaired asset. SFAS
144 provides guidance on how a long-lived asset that is used as part of a
group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS 144
retains the basic provisions of APB 30 on how to present discontinued
operations in the income statement, but broadens that presentation to
include a component of an entity (rather than a segment of a business).
During the fourth quarter of 2002, with the assistance of an
independent, national valuation firm, we completed our annual goodwill
impairment test under SFAS 142, and also tested our identified intangible
assets for impairment under SFAS 144. Due to the severity and the length of
the current industry downturn, including the decrease in the fair market
value of our common stock during 2002, and uncertainty of the timing of
improvement in industry conditions, we revised our earnings forecasts for
the DRM reporting unit. As a result, we recognized impairment charges of
approximately $17.1 million to reduce goodwill and approximately $5.3
million to reduce the identified intangible assets in the DRM reporting
unit. The impairment charges pertain to the core and developed
technologies, customer list and patent applications acquired from, and
goodwill related to the acquisition of eMation, Ltd. in December 2001. The
weighted fair value of the DRM reporting unit was estimated using the
Market Approach (70%) and the Income Approach (30%). The market approach,
weighted the fair values determined by valuing the market value of our
common stock (the Quoted Price Methodology - 35%), transactions of minority
interests in publicly-traded companies engaged in a similar business to
ours (the Exchange Method - 30%) and the median value-to-revenue multiple
of recent transactions in the software industry, adjusted for term debt
(the Acquisition Method - 5%). The income approach weighted the fair value
determined by the expected present value of future cash flows (the
Discounted Cash Flow Methodology - 30%). The fair value of the identified
intangible assets was determined using the expected present value of future
cash flows. The aggregate charges of approximately $22.4 million recorded
in 2002 are included in impairment charges in the accompanying consolidated
statement of operations.
In 2001, we recognized an impairment charge of approximately $2.2
million to reduce the amount of goodwill and intangible assets associated
with a prior acquisition to their estimated fair value of zero. The
impairment charge was attributable to certain technology acquired from, and
goodwill related to the acquisition of Cinax Designs Inc. in 2000. During
the fourth quarter of 2001, we determined that we would not allocate future
resources to assist in the market growth of this technology and we did not
anticipate material future sales of the products. Also in 2001, we
recognized an impairment charge of approximately $1.7 million to reduce the
amount of acquired technology rights associated with a prior equity
financing to its estimated fair value of zero. This impairment charge was
attributable to certain technology acquired from Intel in connection with
the sale of our Series C preferred stock in 1999. During the fourth quarter
of 2001, we determined that we would not allocate future resources to
assist in the market growth of this technology and we did not anticipate
any material future sales of products incorporating this technology. The
aggregate amount of impaired long-lived assets of approximately $3.9
million recorded in 2001 is included in impairment charges in the
accompanying consolidated statement of operations.
55
For the year ended December 31, 2000, we recognized an impairment
charge of approximately $2.8 million to reduce the amount of an intangible
prepaid distribution rights fee (the "Fee") with a recorded fair value
based on a warrant to purchase 1.5 million shares of our common stock
issued to a distributor in connection with a one-year distribution rights
agreement (the "Agreement") to its estimated fair value of zero. The
impairment charge was attributable to the parties' differing
interpretations of the terms of the Agreement, resulting in the immediate
termination of the Agreement and no sales under it. As a result, we
determined that, as of December 31, 2000, the carrying amount of the Fee
was not recoverable and the excess of the carrying amount of the Fee over
the fair value of the Fee of approximately $2.8 million was recorded as an
impairment charge in the accompanying consolidated statement of operations.
Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset
and the estimate of an asset's fair value used to calculate the amount of
impairment to recognize. The use of alternate judgments and/or assumptions
could result in the recognition of different levels of impairment charges
in the financial statements.
h) Revenue Recognition
In 2001, our primary revenue categories consisted of: software licenses for
PC and CE products, including DVD; IA products, including Internet browser
software and hardware reference designs; services for PC, CE and IA products,
including non-recurring engineering customization and development services; and
hardware for PC products, primarily DVD boards and IA products, including
Internet set-top boxes, and integrated circuit boards (note 5 and note 6). Since
December 2001, we license our DRM system products to customers in the
industrial, building automation, technology, medical instrumentation and office
and semiconductor equipment industries (note 4a).
We recognize software revenues in accordance with the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). License revenues are recognized in the period in which persuasive
evidence of an arrangement exists, the fee is fixed or determinable, delivery of
the technology has occurred requiring no significant production modification or
customization and collectibility is probable.
For software arrangements that include multiple elements, SOP 97-2
requires us to allocate the fee to the individual elements based on
vendor-specific objective evidence of fair value ("VSOE"), regardless of the
prices stated within the contract. VSOE is limited to the price charged when the
element is sold separately or, for an element that is not yet sold separately,
the price established by management having the relevant authority. When there is
VSOE for the undelivered elements in multiple-element arrangements that are not
accounted for using contract accounting, we allocate revenue to the delivered
elements of the arrangement using the residual value method. Therefore, we defer
revenues from the arrangement fee equal to the fair value of the undelivered
elements and the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to the
delivered elements. The fair value of maintenance and postcontract customer
support ("PCS") obligations are based upon separate sales of renewals to other
customers or upon renewal rates quoted in the contracts. The fair value of
services, such as training or consulting, is based upon our separate sales of
these services to other customers.
When VSOE does not exist to allocate revenue to each of the various
elements of an arrangement and revenue cannot be allocated using the residual
value method, the entire fee from the arrangement is deferred until the earlier
of the establishment of VSOE or the delivery of all the elements of the
arrangement. In cases where a license grants a customer unspecified upgrade
rights, the license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from the customers in excess of revenue
recognized are recorded as deferred revenue.
Our Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance, Axeda
Connector and Axeda FactorySoft OPC products may be sold on a per-unit basis. In
cases where we sell such DRM products on a per-unit basis, revenues are
recognized when the product ships to an OEM, distributor or end user.
Royalties representing software license fees paid on a per unit basis
are recognized when earned, which is generally based on receiving notification
from licensees stating the number of products sold which incorporate the
licensed technology from us and for which license fees, based on a per unit
basis, are due. The terms of the license agreements generally require the
licensees to notify us within 15 to 45 days of the end of the quarter during
which the sales of the licensees' products take place. In a number of cases, we
record the revenue in the quarter following the sale of the licensee's products
to our customers.
Hardware revenues are recognized upon shipment of products to
customers. For hardware transactions where no software is involved, we apply the
provisions of Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB 101")
issued by the U.S. Securities and Exchange Commission ("SEC").
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly or daily
rates or fixed fees, and we generally recognize revenue as these services are
performed.
56
Revenues related to development contracts involving significant
modification or customization of hardware or software under development
arrangements are recognized in accordance with the provisions of AICPA Statement
of Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1"), using the percentage-of-completion
method, based on the efforts-expended method or based on performance milestones
specified in the contract where such milestones fairly reflect progress toward
contract completion. For software license arrangements that include services
requiring significant modification or customization of the licensed software, we
apply the percentage-of-completion method of contract accounting to the entire
arrangement. For arrangements that include services that, under SOP 97-2,
qualify for separate accounting, we follow the provisions of SOP 97-2 and
allocate revenues to the services element based on VSOE and recognize the
revenues as the services are performed. Revenues related to services are
recognized upon delivery of the service in the case of time and material
contracts. Losses on contracts are recognized for the entire anticipated loss,
if any, as soon as the loss becomes evident.
i) Computer Software Costs
Computer software costs consist of purchased software capitalized
under the provisions of Statement of Financial Accounting Standards No. 86,
"Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86").
Amortization of capitalized software costs is computed on a straight-line basis
over the estimated economic life of the product (notes 4a and 7) or on a basis
using the ratio of current revenue to the total of current and anticipated
future revenue, whichever is greater, and included in cost of revenues in the
accompanying consolidated statement of operations. To date, no internally
developed software costs have been capitalized. All other research and
development expenditures are charged to research and development expense in the
period incurred.
Software developed for internal use is recognized in accordance with
SOP 98-1, "Accounting For The Cost Of Computer Software Developed Or Obtained
For Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. It also provides
guidance on the capitalization of costs incurred during the application
development stage for computer software developed or obtained for internal use.
SOP 98-1 has not had a material impact on our operating results or financial
position.
j) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $1,125,000, $1,908,000 and $2,527,000 and for the years ended
December 31, 2002, 2001 and 2000, respectively.
k) Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.
l) Financial Instruments
Our financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable and notes payable that are
carried at cost, which approximates fair value.
m) Stock-based Compensation
SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"),
provides companies the alternative to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or to continue to
account for such items using the intrinsic value method as outlined under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") with pro forma disclosures of results of operations as if
the fair value method had been applied.
57
At December 31, 2002 we have two stock-based employee compensation
plans, which are described more fully in note 15. We account for those plans
under the recognition and measurement principles of APB 25 and related
interpretations. The following table illustrates the effect on net income (loss)
and net income (loss) per share if we had applied the fair value recognition
provisions of SFAS 123 to stock-based compensation (in thousands, except per
share data):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Net income (loss), as reported $ (51,927) $ 1,427 $ (40,467)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................ (4,860) (4,369) (4,180)
------- ------- -------
Pro forma.................................. $ (56,787) $ (2,942) $ (44,647)
========= ======== =========
Net income (loss) per common share - basic:
As reported................................ $(1.92) $ 0.08 $ (2.44)
====== ======= =======
Pro forma.................................. $(2.10) $ (0.16) $ (2.69)
====== ======= =======
Net income (loss) per common share - diluted:
As reported................................ $(1.92) $ 0.07 $ (2.44)
====== ======= =======
Pro forma.................................. $(2.10) $ (0.15) $ (2.69)
====== ======= =======
We used the following range of assumptions to determine the fair value of
stock options granted using the Black-Scholes option-price model:
2002 2001 2000
- ------------------------------ -------------- ------------- ------------
Dividend yield................ 0% 0% 0%
- ------------------------------ -------------- ------------- ------------
Expected volatility........... 145% 192% 167%
- ------------------------------ -------------- ------------- ------------
Average expected option life.. 4 years 4 years 4 years
- ------------------------------ -------------- ------------- ------------
Risk-free interest rate....... 1.41% 2.28% 5.71%
- ------------------------------ -------------- ------------- ------------
n) 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant areas involving the
use of estimates in these financial statements include allowances for
uncollectible accounts receivable, goodwill and intangible assets, valuation
allowances for deferred tax assets and deferred tax liabilities, foreign income
taxes and percentage of completion for certain sales agreements accounted for
under contract accounting. Actual results could differ from those estimates.
o) Foreign Currency Translation
Except for our subsidiary in Israel, we consider the functional
currency of our foreign subsidiaries to be the local currency, and accordingly,
the foreign currency is translated into U.S. dollars using exchange rates in
effect at period end for assets and liabilities and average exchange rates
during each reporting period for the results of operations. The functional
currency of our Israeli subsidiary is the U.S. Dollar. Adjustments resulting
from translation of foreign subsidiary financial statements are reported in
accumulated other comprehensive income (loss). Gains or losses on foreign
currency transactions are recognized in current operations and prior to 2002
have not been significant to our operating results in any period presented. For
the year ended December 31, 2002, we recorded net foreign currency gains of
approximately $67,000, primarily from our operations in Israel.
58
p) Computation of Net Income (Loss) Per Share
We compute earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share" (SFAS No. 128"). In accordance with SFAS
128, basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method), and the incremental
common shares issuable upon the conversion of the convertible preferred stock
(using the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net income (loss) (in thousands,
except per share data):
i) Year Ended December 31, 2002
Options to purchase approximately 5.1 million shares of common stock
with a weighted-average exercise price of $1.95 were outstanding during the
year ended December 31, 2002 but were not included in the computation of
diluted EPS because the effects of assumed conversion or exercise would
have an anti-dilutive effect on EPS. The outstanding options include 2.1
million options that are vested, with a weighted average exercise price of
$2.69, of which 0.7 million are vested and in the money, with a weighted
average exercise price of $0.01. The options have various expiration dates
during the next 10 years.
Warrants to purchase approximately 0.5 million shares of common stock
with a weighted-average exercise price of $3.28 were vested and outstanding
during the year ended December 31, 2002, but were not included in the
calculation of diluted EPS because the effects of assumed conversion or
exercise would have an anti-dilutive effect on EPS. The outstanding
warrants include 0.2 million warrants that are vested and in the money,
with a weighted average exercise price of $0.22. The warrants are fully
vested and have various expiration dates during the next 5 years.
ii) Year Ended December 31, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
------- ------ ------
Basic EPS
Net income available to common stockholder ............ $ 1,427 18,559 $ 0.08
------- ------ ------
Effect of Dilutive Securities
Warrants ............... ............................ - 218
Outstanding options............. ..................... - 659
Contingently issuable shares ......................... - 759
--- ---
Diluted EPS
Net income available to common stockholders
and assumed conversions ............................. $ 1,427 20,195 $ 0.07
======= ====== ======
Options to purchase approximately 2.0 million shares of common stock
with a weighted-average exercise price of $4.15 were outstanding during the
year ended December 31, 2001 but were not included in the computation of
diluted EPS because the effects of assumed conversion or exercise would
have had an anti-dilutive effect on EPS. The outstanding options included
1.2 million options that were vested, with a weighted average exercise
price of $3.45, of which 0.4 million were vested and in the money, with a
weighted average exercise price of $0.01. The options had various
expiration dates during the next 10 years.
Warrants to purchase approximately 0.2 million shares of common stock,
net of the warrant issued to American Trading S.A. that was canceled on
March 28, 2001, with a weighted-average exercise price of $6.57 were vested
and outstanding during the year ended December 31, 2001, but were not
included in the calculation of diluted EPS because the effects of assumed
conversion or exercise would have an anti-dilutive effect on EPS. The
outstanding warrants include 0.2 million warrants that were vested and in
the money, with a weighted average exercise price of $0.22. The warrants
were fully vested and had various expiration dates during the next 5 years.
59
iii) Year Ended December 31, 2000
Options to purchase approximately 3.1 million shares of common stock
with a weighted-average exercise price of $5.69 were outstanding during the
year ended December 31, 2002 but were not included in the computation of
diluted EPS because the effects of assumed conversion or exercise would
have had an anti-dilutive effect on EPS. The outstanding options included
1.3 million options that were vested, with a weighted average exercise
price of $3.65, of which 1.1 million are vested and in the money, with a
weighted average exercise price of $1.76. The options had various
expiration dates during the next 10 years.
Warrants to purchase approximately 1.8 million shares of common stock with
a weighted-average exercise price of $5.96 were vested and outstanding during
the year ended December 31, 2001, but were not included in the calculation of
diluted EPS because the effects of assumed conversion or exercise would have an
anti-dilutive effect on EPS. The outstanding warrants include 0.2 million
warrants that were vested and in the money, with a weighted average exercise
price of $0.22. The warrants were fully vested and had various expiration dates
during the next 5 years.
q) Recent Accounting Pronouncements
Beginning in February 2003, the Financial Accounting Standards Board
("FASB") staff plans to issue future application guidance (like that found in
Staff Implementation Guides and Staff Announcements) through FASB Staff
Positions ("FSPs"). The FASB staff will circulate a draft of a proposed FSP to
Board members for their review. If a majority of Board members do not object to
the proposed FSP, it will be posted on the FASB website for comment for a period
of 30 days, which will be announced in Action Alert. That exposure allows the
FASB staff and Board to adequately consider constituent comments and concerns
about the proposed FSP. At the end of the exposure period, the FASB staff will
draft the final FSP. Provided that a majority of the Board does not object, the
final FSP will be posted to the FASB website and remain there until it can be
incorporated into the FASB literature. The Board believes that this new process
and form of guidance will ensure more timely and consistent communication about
the application of FASB literature.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. We do not expect the adoption
of SFAS 148 to have a significant impact on our financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees. FIN 45 requires that at
the time a company issues certain guarantees, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002 and are applicable to all guarantees issued by the guarantor
subject to FIN 45's scope, including guarantees issued prior to the issuance of
FIN 45. The adoption of FIN 45 did not have any material impact on the Company's
consolidated financial position or results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements With Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 will be
effective for fiscal years beginning after June 15, 2003. We do not expect the
adoption of EITF 00-21 to have a material impact on our financial position and
results of operations.
In November 2001, the Emerging Issues Task Force issued Topic No. D-103,
subsequently recharacterized as EITF 01-14, "Income Statement Characterization
of Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("EITF
01-14"). In accordance with EITF 01-14, reimbursements received for
out-of-pocket expenses incurred should be characterized as revenue in the
statement of operations. During 2002, we accounted for reimbursements received
for out-of-pocket expenses incurred on a net basis in the balance sheet as a
reduction to accounts receivable. We adopted EITF 01-14 effective January 1,
2002 and reclassified approximately $0.1 million into services and maintenance
revenues and services and maintenance cost of revenues for the year ended
December 31, 2002.
60
At the October 2001 meeting of the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board (the "FASB"), the EITF reached a
consensus on Issue 1 of EITF Issue No. 02-17, "Recognition of Customer
Relationship Intangible Assets Acquired in a Business Combination," ("EITF
02-17"). Issue 1 addresses when an entity recognizes an intangible asset
pursuant to paragraph 39 of SFAS 141, whether the contractual-legal or
separability criteria restrict the use of certain assumptions, such as
expectations of future contract renewals and other benefits related to the
intangible asset that would be used in estimating the fair value of that
intangible asset. The EITF concluded that the contractual-legal and separability
criteria do not restrict the use of certain assumptions that would be used in
estimating the fair value of an intangible asset. Assumptions such as
expectations of future contract renewals and other benefits related to the
intangible asset must be considered in the estimates of fair value regardless of
whether they meet the contractual-legal or separability criteria (note 1g).
Also at the October 2001 meeting, the EITF reached a consensus on Issue 2
of EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination," that the guidance in SFAS 141, paragraph
A20, which states that a customer relationship meets the contractual-legal
criterion if an entity establishes relationships with its customers through
contracts, applies only if a contract is in existence at the date of the
acquisition. The EITF concluded that this provision applies if an entity has a
practice of establishing contracts with its customers. Thus, an entity would
recognize a customer relationship at the date of the business combination even
if there were no contracts in existence at that date since the entity has a
practice of establishing contracts with its customers. The EITF also observed
that this consensus addresses only the recognition of customer relationships and
does not address the valuation of such customer relationships. These consensuses
should be applied on a prospective basis for all business combinations
consummated after October 25, 2002 and all Step 1 and Step 2 impairment tests
performed after October 25, 2002. Accordingly, EITF 02-17 was considered in the
impairment tests that we performed in November 2002 (note 1g).
In September 2002 the EITF reached a consensus in EITF Issue No. 02-13,
"Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in
FASB Statement No. 142, Goodwill and Other Intangible Assets" ("EITF 02-13").
The EITF consensus requires that deferred income taxes, if any, be included in
the carrying amount of a reporting unit for the purposes of the first step of
the SFAS 142 goodwill impairment test. It also provides guidance for determining
whether to estimate the fair value of a reporting unit by assuming that the unit
could be bought or sold in a non-taxable transaction versus a taxable
transaction and the income tax bases to use based on this determination. EITF
02-13 was effective for goodwill impairment tests performed after September 12,
2002. Accordingly, EITF 02-17 was considered in the impairment tests that we
performed in November 2002, and did not have a material effect on our
consolidated financial statements for the year ended December 31, 2002 (note
1g).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"), which addresses significant issues regarding
the recognition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force (EITF) has set forth in EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. We will adopt
this standard on January 1, 2003, and we do not expect the adoption to have a
significant impact on our financial position or results of operations.
r) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2) Furniture and Equipment
Furniture and equipment consist of the following at December 31, 2002
and 2001 (in thousands):
2002 2001
---- ----
Furniture and fixtures.................. $ 793 $ 805
Leasehold improvements.................. 1,145 201
Computer equipment...................... 1,670 1,525
Research and development equipment...... 232 519
Purchased software 851 445
--- ---
4,691 3,495
Less: accumulated depreciation and
amortization 1,579 928
----- ---
Furniture and equipment, net ........... $ 3,111 $ 2,567
======= =======
Assets recorded under capital leases and related accumulated
amortization are approximately $86,000 as of December 31, 2002 and 2001.
Depreciation expense was approximately $1,319,000 and $597,000 for the years
ended December 31, 2002 and 2001, respectively. Included in depreciation expense
is amortization of assets recorded under capital leases of approximately $30,000
for the year ended December 31, 2001.
61
3) Restricted Cash
Restricted cash consists of a portion of the sales price, held by a third
party in escrow for indemnification purposes, related to the sale of the assets
of our Internet Appliance ("IA") business totaling approximately $0.55 million
(note 5b). The remaining escrow balance has been withheld pending the settlement
of a claim submitted by Phoenix and is included in restricted cash in the
consolidated balance sheet as of December 31, 2002 and 2001. Any escrow amounts
not returned to us will be recorded as a charge to the gain on sale of assets in
the period in which such determination is made. In June 2002 we initiated an
arbitration proceeding with the International Chamber of Commerce (No. 12
203/JNK) seeking an order that the entire $0.55 million be disbursed to Axeda.
Phoenix filed an answer and counterclaim in the arbitration, claiming
entitlement to the entire $0.55 million. We filed an answer to the counterclaim,
denying the claim. The parties are currently in settlement discussions.
4) Acquisitions
a) eMation, Ltd.
On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.,
a private company organized under the laws of the State of Israel and
headquartered near Boston, Massachusetts, a developer of Internet-based
solutions that extract and manage information from intelligent devices and make
that information available to people and business systems. As a result of the
acquisition, we are a provider of DRM solutions worldwide. The results of
eMation's operations are included in our consolidated financial statements since
the date of acquisition.
We acquired eMation in consideration for: 8 million shares of Axeda common
stock, valued at approximately $17.4 million; the assumption of 1,428,710 shares
of Axeda common stock reserved for issuance upon exercise of assumed eMation
stock options, 530,000 of which are exercisable for $0.01 per share and the
remaining 898,710 exercisable at $2.14 per share; options exercisable for up to
113,600 shares of Axeda common stock issued at closing pursuant to our 1999
Stock Incentive Plan; and warrants exercisable for up to 7,000 shares of Axeda
common stock exercisable at $2.14 issued to ex-employees of eMation in
consideration for cancellation of outstanding options to purchase shares of
eMation. The aggregate value of these issued and assumed options and warrants
was approximately $2.6 million. The total combined value of the securities
assumed and issued was approximately $20 million and we incurred transaction
costs of approximately $3.4 million related to the eMation acquisition, for an
aggregate purchase price of $23.4 million. We also assumed approximately $5
million of eMation net debt.
The value of the common stock issued was determined based on the average market
price of our common stock a few days before and after the terms of the
acquisition were agreed to and announced. The value of the assumed and issued
options was estimated using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 3.15%, volatility factor of
125%, no dividend factor and a remaining life of 2 years.
The acquisition was recorded under the purchase method of accounting. Prior to
the acquisition, we loaned a total of $4.3 million to eMation for working
capital purposes. We expensed $3.1 million of the purchase price as IPR&D in
connection with the eMation acquisition.
We also issued or assumed warrants at closing exercisable for up to 108,240
shares of Axeda common stock with exercise prices ranging from $4.88 to $21.51
per share to holders of warrants exercisable for shares of eMation. Prior to the
acquisition, we loaned eMation $4.3 million with an interest rate of 3-month
LIBOR plus 2.5%. On the date of the closing of the transaction, we paid certain
employees of eMation for joining us sign-on bonuses totaling $0.3 million.
An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition was deposited with a third party escrow agent to be held in escrow
to compensate us for certain losses and taxes that may arise as a result of the
eMation acquisition. This escrow arrangement expires February 21, 2003. Any
shares returned to us will reduce the balance of goodwill recorded in the
acquisition.
Pursuant to the lock-up agreement executed by each selling eMation shareholder,
each shareholder agreed not to directly or indirectly transfer any shares or
rights relating to the shares of Axeda common stock received pursuant to the
share purchase agreement until the one year anniversary of the closing, subject
to certain exceptions. Axeda common stock issued and to be issued to the selling
eMation shareholders will not be registered at the time of issuance.
62
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed as of the date of acquisition (in thousands):
Current assets..................................... $ 3,856
Property and equipment............................. 1,168
Identified intangible assets....................... 9,745
In-process research and development ("IPR&D")...... 3,112
Goodwill 20,819
------
Total assets acquired......................... 38,700
------
Current liabilities................................ 12,358
Long-term debt..................................... 2,336
Other non-current liabilities...................... 1,428
-----
Total liabilities assumed..................... 16,122
------
Unvested stock options allocated to deferred stock
compensation... .................................... (847)
-----
Net assets acquired........................... $ 23,425
========
The acquired identifiable intangible assets that are subject to amortization
consist of the following (amounts in thousands):
December 31, 2002 December 31, 2001
------------------------------ ---------------------------------
Amount Weighted Amount Weighted Average
Average
Estimated
Useful Life Estimated Useful
(Years) Amount Life (Years)
------------- --------------- ------------ ----------------
Developed Technology $ 210 1 $1,378 2
Core Technology ...... 1,840 4 7,055 5
Patent Applications . -- -- 990 5
Customer Base ....... 110 4 322 5
----- ----- ------ ----
Total ............... $2,160 4 $9,745 5
===== ====== ====== =
The amount allocated to IPR&D was determined by independent appraisal.
The projects in progress, the next generation DRM product and industrial
automation products, required resolution of high-risk testing and development
issues in order to be completed. At acquisition, those projects had not reached
technological feasibility and had no alternative future uses. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 2, "Accounting for
Research and Development Costs," and FASB Interpretation No. 4, "Applicability
of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method,"
amounts assigned to IPR&D technology meeting the above stated criteria must be
charged to expense as part of the allocation of purchase price of a business
combination. The IPR&D technology was valued using the income approach, a cash
flow model under which projected income and expenses attributable to the
purchased technology were identified, and potential income streams were
discounted using a 25% discount rate for risks, probabilities and uncertainties,
including the stage of development of the technology, viability of target
markets and other factors. Accordingly, the amount allocated to IPR&D of $3.1
million was recorded as a charge in the accompanying consolidated statement of
operations in the period of acquisition.
The amount allocated to deferred stock compensation was determined in
accordance with Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation-an
interpretation of APB Opinion No. 25," ("FIN 44"). Under FIN 44, to the extent
that service is required subsequent to the consummation date of the acquisition
in order to vest in the assumed options, a portion of the intrinsic value (if
any) of the unvested awards shall be allocated to unearned compensation and
recognized as compensation cost over the remaining future vesting (service)
period. The amount allocated to unearned compensation cost shall be based on the
portion of the intrinsic value at the consummation date related to the future
vesting (service) period. Accordingly, the intrinsic value, which corresponded
to 530,000 of the total 1,550,000 stock options and warrants assumed and issued,
of approximately $0.8 million was deducted from the fair value of the awards for
purposes of the allocation of the purchase price and allocated to deferred stock
compensation. We are amortizing this amount over the respective vesting periods
of 6 to 24 months and recorded approximately $0.5 million and $0.04 million of
non-cash compensation expense in 2002 and 2001, respectively, related to these
awards.
63
The following unaudited pro forma information is presented as if the
acquisition of eMation occurred as of the beginning of each of the respective
years. The pro forma information, however, is not necessarily indicative of the
results that would have resulted had the acquisition occurred at the beginning
of the period presented, nor is it necessarily indicative of future results.
2001 2000
---- ----
(in thousands, except
per share data)
Revenues $ 18,148 $ 30,866
======== ========
Net loss $ (17,718) $ (61,160)
========= =========
Basic and diluted net loss per weighted average
common share outstanding $ (0.68) $ (2.49)
======== =======
b) Cinax Designs Inc.
In August 2000, we acquired all of the outstanding capital stock of Cinax
Designs Inc. ("Cinax"), a company located in British Columbia, Canada involved
in the development of digital video software products based on MPEG audiovisual
compression for approximately $3.5 million in cash and an aggregate of 825,000
shares of our common stock and shares of no par, non-voting exchangeable
preferred stock ("preferred stock") of our subsidiary, Ravisent British Columbia
Inc. ("Ravisent BC"). The shares of preferred stock are exchangeable, at the
option of the holder at any time, on a one-for-one basis, into shares of our
common stock, have an automatic redemption date of August 1, 2005, and contain
certain dividend restrictions, as defined. The acquisition was recorded under
the purchase method of accounting. The results of operations of Cinax have been
included in our consolidated financial statements from August 11, 2000.
In connection with the acquisition, we expensed $1.4 million of the
purchase price as IPR&D and incurred transaction costs of $0.3 million. Goodwill
and other intangible assets of $3.2 million was recorded and was being amortized
on a straight-line basis over a period of four years. In December 2001 we
evaluated the goodwill and other intangible assets recorded in connection with
the acquisition and recognized an impairment charge of $2.2 million (note 1g).
The intellectual property acquired in this acquisition was not transferred or
sold as a result of the STMicroelectronics or Phoenix transactions (note 5).
On the date of acquisition we recorded prepaid compensation of $0.8
million and deferred stock compensation of $2.1 million in connection with the
cash, common stock (39,807 shares or $0.2 million) and preferred stock (420,806
shares or $1.9 million), that were held in escrow and subject to vesting and
continued employment subsequent to the acquisition. The deferred stock
compensation included amounts recorded for common stock (10,719 shares) and
preferred stock (88,990 shares) with an aggregate value of $0.4 million, held in
escrow for the former non-employee stockholders of Cinax, which were to
indemnify us and were not subject to post-acquisition employment requirements.
No cash was held in escrow for the former non-employee stockholders. When we
terminated the employment of the former employees of Cinax in March 2001, the
remaining balance of $0.3 million of prepaid compensation was released from the
escrow, paid to the former employees, and charged to non-cash research and
development expense in the accompanying consolidated statement of operations. In
addition, the unamortized balance of $0.9 million of the initial $2.1 million
recorded as deferred stock compensation related to 22,840 of the escrowed shares
of our common stock and 260,526 shares of the escrowed preferred stock was
released from the escrow, paid to the former employees, and charged to non-cash
research and development expense in the accompanying consolidated statement of
operations. In August and September 2001, an additional 11,847 shares of common
stock and 111,903 shares of preferred stock, for a total of 123,750 shares were
released from escrow resulting in a charge of $0.1 million to non-cash research
and development expense for the net book value of deferred stock compensation
recorded for these shares. In September 2001, at the end of the escrow claim
period, 53,497 shares were returned to us, comprised of common stock (5,120
shares) and preferred stock (48,377 shares) recorded at an aggregate amount of
$0.2 million, which was recorded as a reduction to deferred stock compensation.
In May 2002 a former principal stockholder of Cinax Designs, Inc.
exchanged 271,839 shares of exchangeable preferred stock ("preferred stock") of
our subsidiary, Ravisent British Columbia Inc. ("Ravisent BC") issued in
connection with the acquisition (Note 1p). Shares of our common stock issued for
this transaction total 756,807 and 484,968 as of December 31, 2002 and December
31, 2001, respectively, and are recorded as issued and outstanding for financial
reporting and earnings per share purposes, including 271,839 shares and 311,826
shares of preferred stock which were exchanged in 2002 and 2001, respectively.
As the remaining unexchanged shares of preferred stock totaling 14,692 shares
are exchanged by the preferred stockholders, such shares will be recognized as
issued and outstanding. The shares of preferred stock are exchangeable, at the
option of the holder at any time, on a one-for-one basis, into shares of our
common stock, have an automatic redemption into shares of our common stock date
on August 1, 2005, and contain certain dividend restrictions, as defined.
64
5) Sales of Assets
a) Sale of Consumer Electronics Assets
On March 1, 2001, pursuant to an Asset Acquisition Agreement, we sold certain
assets related to our CE business to STMicroelectronics NV
("STMicroelectronics"), a Dutch corporation. The assets sold included certain
contracts, equipment, intangible assets, intellectual property, prepaid
expenses, accounts receivable and other assets primarily related to the
operations of the CE business. In connection with the sale, STMicroelectronics
and we entered into certain agreements including an Assignment and Assumption of
Lease with respect to our former corporate headquarters office facility located
in Malvern, Pennsylvania. Certain of our employees entered into employment
agreements with STMicroelectronics. Pursuant to the terms of the Asset
Acquisition Agreement, STMicroelectronics paid approximately $55.6 million in
cash consideration. In connection with the asset sale, we and certain of our
subsidiaries granted to STMicroelectronics certain non-exclusive rights to
license and distribute certain of our technology used in our IA products (note
5b) and PC products.
We recorded a gain on the sale of approximately $47.5 million during the quarter
ended March 31, 2001. The net gain was calculated as follows (in thousands):
Sale price.......................................$55,602
Accounts receivable acquired..................... (261)
Accrued expenses assumed......................... 137
Net book value of deferred stock compensation.... (498)
Net book value of furniture and equipment sold... (2,036)
Net book value of goodwill and intangible assets. (968)
Other assets..................................... (18)
Employee transition and inducement costs......... (2,956)
Professional and legal fees...................... (1,487)
-------
Gain on sale of CE assets........................ $47,515
=======
b) Sale of Internet Appliance Assets
On March 23, 2001, pursuant to an Asset Acquisition Agreement, we sold certain
assets of our IA business to Phoenix Technologies Ltd. ("Phoenix"), a Delaware
corporation. The assets sold included certain contracts, equipment, intangible
assets, intellectual property and prepaid expenses primarily related to the
operations of the IA business, including those purchased from Teknema. Certain
of our employees entered into employment agreements with Phoenix Technologies,
Ltd. Pursuant to the terms of the Asset Acquisition Agreement, Phoenix paid $18
million in cash consideration, of which $1.8 million was being held by a third
party in escrow for indemnification purposes until March 2002 and is included in
restricted cash in the consolidated balance sheet as of December 31, 2001. In
March 2002, we received $1.3 million, including interest of approximately $0.05
million. The remaining escrow balance of approximately $0.55 million has been
withheld pending the settlement of a claim submitted by Phoenix and is included
in restricted cash in the consolidated balance sheet as of December 31, 2002.
Any escrow amounts not returned to us will be recorded as a charge to the gain
on sale of assets in the period in which such determination is made. In June
2002 we initiated an arbitration proceeding with the International Chamber of
Commerce (No. 12 203/JNK) seeking an order that the entire $0.55 million be
disbursed to Axeda. Phoenix filed an answer and counterclaim in the arbitration,
claiming entitlement to the entire $0.55 million. We filed an answer to the
counterclaim, denying the claim. The parties are currently in settlement
discussions.
We recorded a gain on the sale of approximately $4.5 million during the quarter
ended March 31, 2001. The net gain was calculated as follows (in thousands):
Sale Price........................................$18,000
Prepaid expenses.................................. (954)
Net book value of deferred stock compensation .... (121)
Net book value of furniture and equipment sold.... (466)
Net book value of goodwill and intangible assets..(10,586)
License fee....................................... (250)
Employee transition and inducement costs.......... (763)
Professional and legal fees incurred.............. (338)
----
Gain on sale of IA assets......................... $4,522
======
65
c) Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the
results of our operations for the year ended December 31, 2001, as if the
dispositions occurred on January 1, 2001, after giving effect to certain
adjustments, primarily revenues and personnel costs associated with the disposed
businesses, amortization of goodwill, the gains recorded upon the dispositions
and income taxes. The unaudited pro forma financial information for the year
ended December 31, 2001 does not necessarily reflect the results of operations
that would have occurred had the dispositions been completed on January 1, 2001
(in thousands except per share data).
2001 2000
---------- ----------
Revenues.......................................$ 7,142 $ 11,739
======== ========
Net loss...................................... $(49,487) $(15,734)
========= =========
Basic and diluted net loss per weighted
average common share outstanding ........... $ (2.67) $ (2.49)
======== ========
6) Transaction With Sonic Solutions
In May 2002 we entered into a Software Distribution Agreement (the
"Agreement") with Sonic IP, Inc. ("Sonic"), a wholly-owned subsidiary of Sonic
Solutions. As a result, we exited the digital media market (see discussion of
Services, below) and, as of June 30, 2002, terminated or assigned to Sonic,
substantially all of the customer contracts of our PC business. Under the terms
of the Agreement, Sonic paid us $2.0 million for the exclusive and perpetual
license to all of the intellectual property ("IP") of our PC business, which was
delivered effective with the closing of the Agreement, and for certain furniture
and computer equipment ("the "Equipment"). The Equipment, which had a net book
value totaling approximately $331,000, was used by the employees of our PC
business and was not essential to the functionality of the licensed IP. Sonic
also received certain trademarks and World Wide Web domain names associated with
the PC business. In connection with the closing of the Agreement, approximately
10 of our employees in the PC business accepted employment offers from Sonic and
we paid inducements to those employees related to their acceptance totaling
approximately $0.1 million. These inducements were paid in June 2002 and are
included in special charges in the accompanying consolidated statement of
operations for the year ended December 31, 2002. In addition, the Axeda stock
options held by certain of these employees were modified to accelerate vesting
upon termination. In May 2002 we recorded a charge of approximately $24,000
related to the modifications, which is included in special charges in the
consolidated statement of operations for the year ended December 31, 2002. Under
the terms of the Agreement we also agreed to designate our remaining
approximately 14 employees of the PC business to provide unspecified services to
Sonic to create improvements, R&D information, and computer software
(collectively, the "Services") through December 31, 2002. We provided the
Services for May through August 2002 as part of the base license agreement
without additional charge to Sonic. Sonic maintained the Services agreement
through December 31, 2002, and paid Axeda $0.4 million, which approximated our
cost, for the Services provided from August to December 31, 2002. The Services
fees were recognized as services revenues ratably over the period. For the year
ended December 31, 2002, we recognized approximately $0.4 million of services
revenues and cost of revenues related to these services.
Because we did not have vendor-specific evidence of fair value for each of
the elements of this license arrangement, and because we provided the Services
to Sonic after the initial delivery of the licensed IP, we recognized the $2.0
million license fee on a straight-line basis over the seven months ended
December 31, 2002, which was the period that we agreed to provide the Services.
Approximately $0.2 million of the net book value of the Equipment was charged to
expense and is included in special charges in the accompanying consolidated
statement of operations for the year ending December 31, 2002. The remaining net
book value of the Equipment of $0.2 million, which was attributed to the
Equipment that was utilized by our employees who provided the services to Sonic
through December 31, 2002, was amortized over the seven-month term of the
Services.
Also as part of our strategy to exit the PC business, we vacated our
offices in San Jose, California in May 2002, and, in July 2002, we terminated
our lease for this facility. The original term of the lease ended in March 2005.
In July 2002, we paid approximately $135,000, including $64,000 held by the
lessor as security from the inception of the lease, to the lessor as an
inducement to cancel the lease. We also paid $210,000 in July 2002 and, for
nominal consideration, sold furniture, computer equipment and leasehold
improvements to the new lessee as incentives to the new lessee to enter into a
lease for the premises with the lessor. The total cash payments of $345,000,
including the foregone security deposit, and the net book value of the assets
sold of $168,000 are included in special charges in the accompanying
consolidated statement of operations for the year ending December 31, 2002.
66
A summary of special charges recorded for the year ended December 31, 2002,
all in connection with our exit from the PC business, is as follows (in
thousands):
Net book value of equipment.........$ 166
Employee termination expenses....... 130
Inducements to other employees...... 11
Lease termination costs............. 513
---
Total special charges $ 820
=====
7) Acquired Intangible Assets (note 1g)
Acquired intangible assets that are subject to amortization at December
31, 2002 and 2001, consist of the following (in thousands):
Gross Carrying Amount Accumulated Amortization
----------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Developed Technology .....$ 210 $ 1,378 $ 21 $ 55
Core Technology .......... 1,840 7,055 50 116
Patent Applications ...... - 990 - 16
Customer Base ............ 110 322 2 5
--- --- - -
Total ...............$ 2,160 $ 9,745 $ 73 $ 192
======= ======= ===== =====
Aggregate amortization expense was approximately $2.2 million, $2.4
million, and approximately $5.2 million for the years ended December 31, 2002,
2001 and 2000, respectively. Estimated aggregate expense for each of the next 5
years is as follows (in thousands):
Charged to:
--------------------------------
Cost of Operating
Total revenues expense
--------- ------------ ---------------
Year ending December 31,
2003 ........................ $ 665 $ 636 $29
2004 ........................ 474 447 27
2005 ........................ 474 447 27
2006 ........................ 474 447 27
2007 ........................ -- -- --
8) Goodwill (note 1g)
The changes in the gross carrying amount of goodwill for the years ended
December 31, 2002 and 2001, are as follows (in thousands):
PC CE IA DRM Total
-- -- -- --- -----
Balance as of December 31, 2000 ............ $ 3,376 $ 3,610 $ 16,253 $ - $23,239
-------- ------- -------- -------- --------
Goodwill acquired during the year .......... 729 - - 20,819 21,548
Impairment charges ......................... (4,105) - - - (4,105)
Goodwill written off related to sales
of assets of businesses .................. - (3,610) (16,253) - (19,863)
-------- ------- -------- -------- --------
Balance as of December 31, 2001 ............ $ - $ - $ - $ 20,819 $ 20,819
======= ======= ======== -------- --------
Impairment charges ......................... (17,168) (17,168)
-------- --------
Balance as of December 31, 2002 ............ $ 3,651 $ 3,651
======= =======
Goodwill acquired in 2001 is not deductible for income tax purposes.
67
Summarized below are the effects on net income (loss) and net income (loss)
per share data, if we had followed the amortization provisions of SFAS 142 for
all periods presented (in thousands, except per share amounts):
For the Year Ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
Reported net income (loss) ........ $ (51,927) $ 1,427 $ (40,467)
Add Back: Goodwill amortization .. -- 2,246 5,234
---------- --------- ----------
Adjusted net income (loss) ........ $ (51,927) 3,673 $ (35,233)
========== ========= ==========
Basic earnings (loss) per share:
Reported net income (loss) $ (1.92) $ 0.08 $ (2.44)
Goodwill amortization .... -- 0.12 0.32
---------- --------- ----------
Adjusted net income (loss) $ (1.92) $ 0.20 $ (2.12)
========== ========= ==========
Diluted earnings (loss) per share:
Reported net income (loss) $ (1.92) $ 0.07 $ (2.44)
Goodwill amortization .... -- 0.11 0.32
---------- --------- ----------
Adjusted net income (loss) $ (1.92) $ 0.18 $ (2.12)
========== ========= ==========
9) Inventories
Net inventories consist of the following at December 31, 2002 and 2001
(in thousands):
December 31,
--------------------------
2002 2001
-------- -------
Raw materials ..... $-- $ 936
Products in process -- --
Finished products . -- 1,134
----- ------
Inventories, net .. $-- $2,070
===== ======
10) Notes Payable
Note Payable - Bank Leumi
In connection with the closing of the share purchase agreement to acquire
eMation on December 7, 2001, we acquired the balance of $1,650,000 of eMation's
amount outstanding under a $1,700,000 line of credit with Bank Leumi in Israel.
The line of credit was paid in full in January 2002, including interest of
approximately $21,000.
Equipment Line of Credit
As of December 31, 2002, we had approximately $222,000 outstanding on an
equipment line of credit with EVP with interest rates ranging from 12% to 13%
and payments due monthly over a 36 month period ending in December 2003. The
line of credit was available to finance purchases of capital equipment through
September 30, 2001. In connection with the agreement, EVP has a senior security
interest in certain capital equipment acquired from eMation. In addition, the
line of credit agreement requires us to provide EVP with copies of quarterly
financial statements within 45 days of the end of each quarter and audited
annual financial statements within 90 days of the end of each year as well
as other information and notifications regarding eMation's financial and
operating results.
As of December 31, 2002, we are in compliance with all of the covenants to
EVP.
68
11) Accrued Expenses
Accrued expenses consist of the following:
December 31,
-------------------
2002 2001
---- ----
Legal and professional fees ............ $1,202 $2,708
Payroll and related costs .............. 2,778 2,951
Severance .............................. 355 899
Unutilized leased facilities ........... 566 107
Royalties to Israeli government agencies 828 620
Legal settlements ...................... 277 277
Accrued Dolby royalties ................ -- 122
Sales, excise and other taxes .......... 689 192
Other .................................. 1,320 1,052
------ ------
$8,015 $8,928
====== ======
12) Loans Receivable--Officers
In November 2000, we entered into an agreement to loan a newly hired
officer $50,000 for the purpose of relocation. In September 2001, the officer's
employment was terminated and the remaining balance of the loan of $31,000,
including interest of approximately $4,000, was forgiven.
From September to November 2000, we advanced $189,510 to an officer. In
March 2001, the officer accepted employment with STMicroelectronics in
connection with the sale of our CE assets (note 5a). The loan is payable on
demand.
In August and September 2000, we entered into agreements to loan an
executive officer $52,000 and $96,000, respectively, for an aggregate loan
amount of $148,000. The loans were secured by all of the shares of our common
stock held or subsequently acquired by the officer. The loans included interest
at 5% per annum and were originally due and payable on December 31, 2000,
including all accrued and unpaid interest. In July 2001, we advanced this
executive officer an additional $250,000. Under the terms of the executive
officer's separation agreement, the aggregate amount of the advances of
$414,000, including interest of approximately $16,000 was forgiven in 2002.
In January 2000, we entered into an agreement to loan a former officer
$160,000. The loan was secured by all of the shares of our common stock held or
subsequently acquired by the former officer and any proceeds from the
disposition of the stock. The loan included interest at 5% per annum and was
originally due December 31, 2000. In May 2002 we reached an agreement with the
former officer to re-pay a portion of the remaining balance. The officer
previously paid $15,000 of the loan, leaving a balance of $145,000, which was
fully reserved during the fourth quarter of 2001. Under the agreement, in June
2002, the former officer paid us $50,000 and surrendered 20,000 shares of Axeda
common stock held by the former officer (note 14).
In November 1999, we entered into an agreement to loan an officer
approximately $288,800. The loan was to be repaid in twenty-four monthly
installments of approximately $13,000, with interest at 8%. The agreement also
provided for a monthly bonus to the officer in an amount equal to the monthly
loan repayment. In connection with the sale of the IA assets (note 5b) in March
2001, the unpaid loan balance of approximately $114,000 was forgiven.
13) Other Liabilities
Severance
A portion of our liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date.
Employees are entitled to one month's salary for each year of employment or a
portion thereof. Our liability for all of our employees, is fully provided by
monthly deposits with insurance policies and by an accrual, totaling
approximately $381,000 and is included in accrued expenses as of December 31,
2002. The aggregate value of these policies of approximately $252,000 is
included in other current assets in our consolidated balance sheet as of
December 31, 2002. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds is based upon the cash surrender
value of these policies.
69
14) Equity Transactions and Capital Stock
Stock Repurchase Program and Treasury Stock
In September 2001, the board of directors approved and we commenced a
program to repurchase up to $10 million worth of our outstanding shares of
common stock in the open market over the next 12 months, at the discretion of
management. From September to December 2001, we repurchased 383,800 shares for
an aggregate cost of approximately $621,000 including commissions, at an average
market price per share of approximately $1.58. No shares were repurchased in
2002.
In May 2002 we reached an agreement with a former officer to re-pay a
portion of the remaining balance of an original loan for $160,000 that was
originally extended to the officer in February 2000. The officer previously paid
$15,000 of the loan, leaving a balance of $145,000. Under the agreement, in June
2002, the former officer paid us $50,000 and surrendered 20,000 shares of Axeda
common stock held by the former officer. On the day that we received the shares,
the fair market value of our common stock was $1.97 per share. As a result,
during the quarter ended June 30, 2002, we recorded treasury stock of $39,400.
The aggregate amount of $89,400 was recorded as a recovery of bad debt expense
in the consolidated statement of operations for the year ended December 31,
2002.
Capital Stock
In 1999, our articles of incorporation were amended and restated. We are
authorized to issue 50,000,000 shares of $.001 par value common stock and
5,000,000 shares of $.001 par value undesignated preferred stock.
Other Equity Transactions
In April 1999, we completed a financing in which we issued convertible
securities to an affiliate of Intel for $4.7 million and entered into a license
agreement covering certain Intel technology. The purchase price received from
Intel consisted of cash consideration of $3.0 million and, in addition, we were
granted a license for Intel technology valued at $1.7 million. The Intel license
permitted us to incorporate the Intel digital content receiver technology into
our products on a royalty free basis as our products are subsequently licensed
to our former digital media customers. We capitalized the $1.7 million and
subsequently wrote the balance off in December 2001 as an impairment charge
(note 1g).
In March 1998, we entered into a subscription and technology license
agreement. This agreement provided, among other things, for us to license
certain technology to an unrelated third party (the licensee). Under an
amendment of this agreement, we received a promissory note with an aggregate
value of $500,000 due in April 2000. The $500,000 note reflects the final
payment under the agreement. The note was satisfied in June 2000.
15) Stock Options, Stock Purchases and Warrants
a) Stock Options
We adopted the 1995 Stock Option Plan (the 1995 Plan) in May 1995. The
1995 Plan provided for the grant of incentive stock options and non-qualified
stock options to employees, consultants, our advisors, and members of the board
of directors to purchase shares of common stock. Prior to the adoption of the
1995 Plan, 43,258 options were granted to employees. Under the terms of the 1995
Plan, authorized options were granted at estimated fair value. The options
generally vest over a period ranging from 2 to 5 years and expire 5 to 10 years
from the grant date. In 1998 the board of directors approved an amendment to our
1995 Plan in which the total number of options available for grant was increased
to 8,500,000. In April 1999, we, with the approval of the board of directors,
adopted the 1999 Stock Incentive Plan (1999 Plan) as a successor to the 1995
Plan. The 1999 Plan has reserved 4,505,361, 3,905,361 and 3,383,529 shares as of
December 31, 2002, 2001 and 2000, respectively. The 1999 Plan has three separate
programs which included; the discretionary option grant program under which
employees may be granted options to purchase shares of common stock; the stock
issuance program under which eligible employees may be granted shares of common
stock; and the automatic grant program whereby eligible non-employee board
members are granted options to purchase shares of common stock.
In October 2002 we granted 674,000 stock options to employees,
including 100,000 to our Chief Executive Officer ("CEO") and 75,000 to our
President, with an exercise price per share equal to the fair market value of
our common stock of $0.43.
In August 2002 we granted 500,000 stock options to employees with an
exercise price per share equal to the fair market value of our common stock and
ranging from $0.89 to $1.12.
In April 2002 we granted 260,000 stock options to employees, including
65,000 to two of our directors, with an exercise price per share equal to the
fair market value of our common stock and ranging from $2.63 to $2.67.
70
In February 2002 we granted 1,012,200 stock options to employees,
including 100,000 to our CEO, with an exercise price per share equal to not less
than the fair market value of our common stock on the date of grant and ranging
from $2.53 to $3.03.
In February 2002 we granted 20,000 stock options to employees with an
exercise price of $0.01 per share, which was less than the fair market value of
our common stock on the date of grant. We have recorded approximately $50,000 of
deferred stock compensation, which is being amortized over the vesting term of 2
years.
In December 2001 and in connection with the acquisition of eMation
(note 4), we assumed 530,000 unvested stock options held by certain officers and
employees of eMation exercisable at a price of $0.01, which was less than the
fair market value of our common stock of $2.14 on the date of the acquisition.
We recorded deferred stock compensation of approximately $847,000 that is being
amortized on a pro rata basis over the vesting periods of 6 to 24 months. Also
in connection with the acquisition of eMation (note 4), we assumed 883,710
unvested and 15,000 fully vested stock options held by certain officers and
employees of eMation and issued 113,600 unvested stock options to an officer and
certain employees of eMation exercisable at a price of $2.14, which was equal to
the fair market value of our common stock on the date of the acquisition.
In August 2001, the board of directors granted an aggregate of 331,000
stock options to an officer-employee with an exercise price of $0.01 per share.
We recorded deferred stock compensation of approximately $0.5 million that is
being amortized over the vesting period of three years. In connection with the
closing of the acquisition of eMation (note 4), in February 2002, options for
100,000 shares became immediately vested and exercisable. As a result we
recorded additional non-cash compensation expense of approximately $0.1 million
attributable to the accelerated vesting of this option. Also in August 2001, the
board of directors granted 300,000 stock options to the officer-employee with an
exercise price equal to the fair market value on the date of grant. These
options vest 25% upon completion of one year of service from the date of grant,
with the balance vesting equally over a 36-month period measured from the first
anniversary of the vesting commencement date.
In July 2001 the board of directors granted 380,000 stock options to
employees with an exercise price of $0.01 per share. We recorded deferred stock
compensation of approximately $0.8 million that is being amortized on a pro rata
basis over the vesting period of 12 months. Also in July 2001, the board of
directors granted 162,500 stock options to employees with an exercise price
equal to the fair market value on the date of grant, that are fully vested upon
the completion of one year of service from the date of grant.
In May 2000, we granted 78,500 options to purchase common stock to
employees, with an exercise price of $0.01 per share. We recorded approximately
$633,000 of deferred stock compensation in connection with these options that is
being amortized over the option vesting periods, ranging from 18 to 24 months.
In June 2000 we granted 17,500 options to purchase common stock, with an
exercise price of $0.01 per share. We recorded approximately $112,000 of
deferred stock compensation in connection with these options that are being
amortized over the option vesting period of 24 months.
In February 2000, subsequent to the original dates of grant, the
portion of an employment agreement for an employee relating to stock option
vesting was amended. The amendment was considered a modification of the original
terms of the awards, requiring a new measurement date as if the rights were
newly granted. The amount of compensation expense recognized was determined by
calculating the total number of options that would have vested at the end of the
six-month post-termination period multiplied by the difference between the fair
market value on the date of modification and the original exercise price.
Because subsequent to the modification the individual was no longer an employee,
there was no service period and the intrinsic value of the modified options of
approximately $346,000 was expensed immediately.
A summary of stock option activity follows:
2002 2001 2000
-------------------------- ------------------------ -----------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
Options price Options price Options price
------------- ----------- ----------- --------- ---------- -----------
Balance as of beginning of year .. 3,781,592 $2.43 3,055,318 $ 5.69 3,479,316 $ 5.09
Options granted...... ............ 2,533,700 $1.63 1,600,300 $ 1.07 933,254 $ 6.35
Options assumed...... ............ - $ - 1,428,710 $ 1.35 - $ -
Options (forfeited)......... ..... (1,029,142) $3.27 (1,135,604) $ 9.53 (468,980) $ 11.05
Options (exercised)......... ..... (207,331) $0.26 (1,167,132) $ 1.35 (888,272) $ 1.17
--------- ----------- ---------
Balance at end of year....... ... 5,078,819 $1.95 3,781,592 $2.43 3,055,318 $ 5.69
========= ========= =========
71
At December 31, 2002, 2,115,396 options with a weighted-average exercise
price of $2.69 were fully vested and exercisable. At December 31, 2001,
1,226,317 options with a weighted-average exercise price of $3.45 were fully
vested and exercisable.
The weighted-average exercise prices and weighted average grant-date fair
value of options granted during 2002 and 2001 are as follows:
2002 2001
---------------------------- -------------------------------
Weighted Weighted Weighted Weighted
average average fair average average fair
exercise price value exercise price value
-------------- ------------ -------------- -------------
Exercise price equals fair market value ............. $ 1.62 $ 1.39 $ 1.96 $ 1.85
Exercise price exceeds fair market value ............ $ 1.96 $ 1.36 N/A N/A
Exercise price is less than fair market value ....... $ 0.01 $ 2.52 $ 0.01 $ 1.96
$ 1.63 $ 1.39 $ 1.07 $ 1.90
The following summarizes information about our stock options outstanding at
December 31, 2002:
Options outstanding Options exercisable
--------------------------------------------- -----------------------
Number Weighted average Weighted Number Weighted
outstanding remaining average outstanding average
at December contractual life exercise at December exercise
Range of exercise prices 31, 2002 (years) price 31, 2002 price
- ------------------------ -------- ------- ----- -------- -----
$ 0.01 - 3.88 ........... 4,676,754 8.7 $1.29 1,759,064 $ 1.26
$ 3.89 - 7.75 ........... 138,550 6.8 $6.57 107,791 $ 6.56
$ 7.76 - 11.63 ........... 242,815 1.8 $9.99 229,108 $ 10.05
$ 11.64 - 15.50 ........... 2,500 0.2 $14.88 2,500 $ 14.88
$ 15.51 - 19.38 ........... 9,850 1.6 $15.94 9,609 $ 15.94
$ 19.39 - 38.75 ........... 8,350 4.1 $38.75 7,324 $ 38.75
----- -----
Totals .............. 5,078,819 8.3 $1.95 2,115,396 $ 2.69
========= =========
The per-share weighted-average fair value of stock options that we issued
during 2002, 2001 and 2000 was $1.39, $1.90 and $6.56, respectively.
b) Employee Stock Purchase Plan
In April 1999, we, with the approval of the board of directors, adopted an
Employee Stock Purchase Plan and reserved 500,000 shares of common stock for
issuance thereunder. The purchase plan permits eligible employees to acquire
shares of our common stock through periodic payroll deductions of up to 15% of
total compensation. Each offering period will have a maximum duration of
twenty-four months. The price at which the common stock may be purchased is 85%
of the lesser of the fair market value of our common stock on the first day of
the applicable offering period or on the last day of the respective purchase
interval. The initial offering period commenced on the effectiveness of our
initial public offering in July 1999.
A summary of the shares purchased is as follows:
Number of Purchase Cost
Purchase Date Shares Purchased (in thousands)
------------- ---------------- --------------
January 31, 2000 27,513 $ 281
July 31, 2000 48,378 190
January 31, 2001 27,330 71
July 31, 2001 11,405 15
February 1, 2002 9,627 14
July 31, 2002 58,458 60
------ --
Total 182,711 $ 631
======= =====
On the January 31, 2003 purchase date, 70,652 shares were purchased at an
aggregate cost of $34,000.
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c) Warrants
The warrants that we issue generally contain customary provisions requiring
proportionate adjustment of the exercise price in the event of a stock split or
stock dividend.
A summary of warrant activity follows:
Common stock
------------------------------
Weighted
Number Average
of warrants exercise price
----------- --------------
Balance as of December 31, 1999 732,314 $ 0.65
------- ---------
Warrants granted ......... 1,509,166 6.98
Warrants canceled ....... -- --
Warrants exercised ....... (405,847) 0.18
------- ---------
Balance as of December 31, 2000 1,835,633 $ 5.96
------- ---------
Warrants granted ......... 48,077 12.84
Warrants assumed (note 4) 74,661 5.52
Warrants canceled ........ (1,500,000) 7.00
Warrants exercised ....... -- --
------- ---------
Balance as of December 31, 2001 458,371 $ 3.19
------- ---------
Warrants granted ......... 3,750 6.64
Warrants assumed ......... 2,068 18.03
Warrants canceled ........ -- --
Warrants exercised ....... -- --
------- ---------
Balance as of December 31, 2002 464,189 $ 3.28
======= =========
In December 2001 and in connection with the acquisition of eMation (note
4), we issued or assumed 115,238 fully-vested stock warrants at exercise prices
ranging from $2.14 to $21.51.
In June 2000, we entered into a one-year distribution rights agreement (the
Agreement) with American Trading S.A. (ATSA) for exclusive distribution of our
Internet television set-top box product in Brazil. Upon the signing of the
Agreement we issued a warrant to purchase 1,500,000 shares of our common stock
to ATSA with an exercise price of $7.00 per share, which approximated fair
market value on the date of grant. The warrant was fully vested and
non-forfeitable on the date of grant, had a two-year term, and contained certain
exercise restrictions as described in the warrant agreement. At June 30, 2000,
we recorded the estimated fair value of the warrant of $5.6 million as an
intangible prepaid distribution rights fee and additional paid-in capital. On
March 28, 2001, pursuant to the January 2001 settlement and release agreement
with ATSA canceling the Agreement, the warrant was canceled (note 16c). On March
28, 2001, the warrant had an estimated fair value of approximately $435,000,
which was estimated using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 4.21%, volatility factor of
96%, no dividend factor and a remaining life of 1.25 years.
16) Commitments and Contingencies
a) Leases
We lease our office facilities and various equipment under operating leases
that expire at various dates through 2011. We also lease automobiles with
combined annual rentals of approximately $167,000 and $49,000 for the years
ending December 31, 2003 and 2004, respectively. The automobile lease terms
expire at various dates from August 2003 through April 2005. The following is a
schedule by year of future minimum lease payments relating to noncancelable
operating leases as of December 31, 2002 (in thousands):
Year ending December 31,
------------------------
2003 .......................... $ 1,601
2004 .......................... 1,145
2005 .......................... 676
2006 .......................... 607
2007 .......................... 477
Thereafter .................... 692
---
Total minimum lease payments*.. $ 5,198
=======
* Minimum lease payments have not been reduced by minimum sublease
rentals of $279 due in the future under noncancelable subleases.
73
The following table shows the composition of total rent expense for
operating leases, except those with terms of one month or less that were not
renewed (in thousands):
Year Ending December 31,
-------------------------------------------------
2002 2001 2000
--------------- ----------------- ----------------
Minimum rentals** $ 1,915 $ 1,023 $1,633
Less: Sublease rentals** 441 92 --
---- ---- -----
$ 1,474 $ 931 $1,633
======= ===== ======
** Minimum rentals and minimum sublease rentals include approximately $500
and $300, respectively, for amounts accrued for an unutilized leased facility,
which we subleased to an unrelated third party.
In September 2002, we entered into a lease for approximately 4,500
square feet of space in an office building in the same business park as our
former offices located in Malvern, Pennsylvania. This facility is leased at an
annual rental of approximately $42,000, plus operating expenses (approximately
$17,000 per year), utilities and taxes, and is used for administrative
activities. The lease commenced in December 2002 and expires in November 2005.
In May 2002, we entered into a sub-lease for approximately 35,000
square feet of space in an office building in the same business park as our
former offices located in Mansfield, Massachusetts. This facility is leased at
an annual rental of approximately $310,000, plus operating expenses
(approximately $170,000 per year), utilities and taxes, and is used for research
and development, sales and support and administrative activities. The lease
commenced in June 2002 and expires in July 2007.
Prior to occupying our new offices in Mansfield, Massachusetts, we
leased approximately 12,000 square feet of space in an office building, located
the same business park as our new offices, for our research and development,
sales and support and administrative activities. We completed our occupation of
the new offices in July 2002 and, in September 2002, we entered into a sublease
with a subtenant (the "Subtenant") for the balance of the term of this lease for
our former offices. The lease for our former offices expires in July 2004 and
requires us to pay minimum future rental payments totaling approximately $0.5
million as of December 31, 2002. Under the terms of the sublease agreement, we
will receive minimum future rental payments totaling approximately $0.3 million
from the Subtenant. For the year ended December 31, 2002, we recorded a charge
of approximately $0.2 million, which is included in other general and
administrative expense, for the amount representing the excess of the future
minimum rental payments to be made over the future minimum sublease payments to
be received.
We also lease approximately 1,600 square feet of space in Israel for
research and development activities at an annual rental of approximately
$28,000. This facility is leased through August 2003.
We currently lease 5 other international sales offices in France,
Holland and Japan with a total of approximately 6,800 square feet of space. The
combined annual rental for these offices is approximately $350,000 and 233,000
for 2003 and 2004, respectively, and approximately $120,000 for 2005 through
2010. The leases have terms expiring from April 2003 through February 2011. The
lease for our primary office in France expires in 2011, but is cancelable
without penalty in 2008 upon 6 months written notice. In 2002 we closed our
Great Britain facility and consolidated its activities in our offices in France.
We maintain approximately 9,000 square feet of office space in
Marlborough, Massachusetts under an operating lease. This space is no longer
used for operating purposes. The lease requires annual rental payments totaling
approximately $181,000 and expires in February 2009. The present value of the
future lease payments, discounted at 5%, of approximately $1.2 million was
accrued by eMation as of the date of acquisition.
74
b) Royalties
Under various licensing agreements, we are required to pay royalties,
generally on per unit basis, on the sales of certain products that incorporate
licensed technology. Royalty expense under such agreements was approximately
$2,688,000, $1,324,000 and $3,245,000 for the years ended December 31, 2002,
2001 and 2000, respectively, and is included in cost of revenues in the
consolidated statements of operations.
Royalty Commitments to the Chief Scientist:
Prior to 2001, eMation had received grants from the Chief Scientist of
Israel's Ministry of Industry and Trade to finance the research and development
of certain products. We are obligated to pay royalties at a rate of 3.0 - 3.5%
resulting from sales of the products developed within the framework of the
aforementioned grants, and the services related to the products, up to an amount
equal to 100% of the grants received, linked to the U.S. dollar. Grants received
in respect of approvals obtained after December 31, 1998bear interest at an
annual rate equal to 12-month LIBOR (1.447% at December 31, 2002).
As of December 31, 2002, we accrued royalties of approximately $0.2
million.
Royalties to the Fund for the Encouragement of Marketing Activities:
Prior to 2001, the Israeli Government, through the Fund for the
Encouragement of Marketing Activities, awarded eMation grants for participation
in foreign marketing expenses. We are required to pay royalties at the rate of
4% of the increase in export sales, up to an amount equal to 100% of the grants
received linked to the U.S. dollar. Grants received after January 1, 1998 bear
interest at an annual rate equal to 6-month LIBOR (1.383% at December 31, 2002).
As of December 31, 2002, we accrued royalties of approximately $0.7
million.
DRM License Fees:
In June 2002 we entered into a Software License Agreement ("the Agreement")
with a vendor to provide server and client software that, beginning in August
2002, is incorporated into our DRM Enterprise Server products. License fees are
due and payable at the rate of 2.5% of each billable sale, as defined. Under the
Agreement, we agreed to pay a minimum, non-refundable prepaid license fee of
$400,000 (the "minimum license fee"), which is payable in installments. We paid
$100,000 in July 2002, and are required to pay $100,000 on June 30, 2003 and the
remaining $200,000 on December 15, 2003.
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c) Contingencies
On November 27, 2001, a putative shareholder class action was filed against us,
certain of our officers and directors, and several investment banks that were
underwriters of our initial public offering. The action was filed in the United
States District Court for the Southern District of New York, purportedly on
behalf of investors who purchased our stock between July 15, 1999 and December
6, 2000. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the
Securities Exchange Act of 1933 and Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder against one or both of the Company
and the individual defendants. The claims are based on allegations that the
underwriter defendants agreed to allocate stock in our July 15, 1999 initial
public offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases in
the aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus
for our initial public offering was false and misleading in violation of the
securities laws because it did not disclose these arrangements. This lawsuit is
part of the massive "IPO allocation" litigation involving the conduct of
underwriters in allocating shares of successful initial public offerings. We
believe that more than one hundred and eighty other companies have been named in
more than eight hundred identical lawsuits that have been filed by some of the
same plaintiffs' law firms. Certain of our employees were members of the
putative classes alleged in these actions (the "the Individual Defendants"). On
July 15, 2002, we moved to dismiss all claims against us and the Individual
Defendants. On October 9, 2002, the Court dismissed the Individual Defendants
from the case without prejudice. We believe that such lawsuit and claims are
without merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend this
action could substantially harm our results of operations, liquidity and
financial condition.
Between February and April 2000, eleven class action lawsuits were filed against
certain of our current and former officers and directors and us in the United
States District Court for the Eastern District of Pennsylvania. On May 25, 2000,
the cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In
re RAVISENT Technologies Inc. Securities Litigation." Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Exchange Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seeks unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are waiting for
a hearing date to be set for the motion. Certain of our employees and certain
holders of 5% or more of Axeda common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits or
claims are without merit and that we have meritorious defenses to the actions.
We plan to vigorously defend the litigation. However, failure to successfully
defend these actions could substantially harm our results of operations,
liquidity and financial condition.
Various third parties have notified us, as well as some of our former custmers
for our former digital media products, that our former DVD products infringe
patents held by such third parties. We have received notices of up to an
aggregate of five million dollars asserting rights under the indemnification
provisions and warranty provisions of our license agreements from several
customers relating to such claims of infringement. We have not determined
whether and to what extent the patents held by such third parties are valid and
whether and to what extent our products may infringe such patents. We are unable
to predict the outcome of these matters, however, we are able to reasonably
estimate an amount of possible loss given the current status of certain of these
matters, and, during the quarter ended June 30, 2002, accrued $375,000, which is
included in other general and administrative expense in the accompanying
consolidated statement of operations for the year ended December 31, 2002.
In June 2000, we entered into a one-year distribution rights agreement ("the
Agreement") with American Trading S.A. ("ATSA") for exclusive distribution of
our Internet television set-top box product in Brazil. Upon the signing of the
Agreement we issued a warrant to purchase 1,500,000 shares of our common stock
to ATSA with an exercise price of $7.00 per share, which approximated fair
market value on the date of grant. The warrant was fully vested and
non-forfeitable on the date of grant, had a two-year term, and contained certain
exercise restrictions as described in the warrant agreement.
76
Due to the parties' differing interpretations of the terms of the Agreement, in
January 2001 the parties entered into a settlement and release agreement ("the
Release"). The Release provides for the immediate termination of the Agreement,
including the right for Axeda to terminate the warrant and a royalty-free right
in 2001 for Axeda to use the mark "WWWTV", which Axeda owns as of January 1,
2002. In addition, in January 2001 we paid approximately $1.2 million to ATSA in
exchange for the settlement and release and were required to pay an additional
minimum finder's fee of $1 million in January 2002 for sales of the Internet
set-top box in Brazil in 2001. The aggregate amount of the settlement of $2.2
million, net of the estimated fair value of the canceled warrant of $0.4 million
(note 15c) is included in other selling and marketing expenses in the
consolidated statement of operations for the year ended December 31, 2001. In
January 2002, the parties were in disagreement about whether and to what extent
a payment for any finders fee was due to ATSA for 2001. On January 30, 2002, the
parties entered into a confidential general settlement and release agreement,
which resolved the dispute between the parties concerning the payment of a
finder's fee. In connection with the January 2002 settlement, in January 2002 we
paid $325,000 in cash to ATSA and transferred title to 15,000 Internet set-top
boxes, with a net book value of approximately $675,000, for an aggregate and
final settlement of the liability to ATSA of $1,000,000.
On or about August 10, 2000, Corum Group, Ltd. filed an action against Axeda and
Cinax Designs Inc. in the United States District Court for the Western District
of Washington (No. C00-1352D). Corum, a business consultant, alleged that it had
an agreement with Cinax whereby Cinax would pay Corum an 8% transaction fee in
the event Corum located a purchaser for Cinax. We acquired Cinax by agreement
dated as of July 13, 2000 for compensation of $3.5 million in cash and an
aggregate of 825,000 shares of our common stock and non-voting exchangeable
preferred stock of one of our subsidiaries, Ravisent British Columbia Inc.,
which preferred stock is exchangeable, on a one-for-one basis, into shares of
our common stock. In the complaint Corum alleged that it introduced Axeda to
Cinax and that it was therefore entitled to $281,362 and 66,000 shares of our
common stock. As part of our acquisition of Cinax, the shareholders of Cinax
agreed to indemnify us for 50% of any liability stemming from the Corum claim
and an aggregate of approximately 53,500 shares of our common stock and
non-voting, no-par exchangeable preferred stock of Ravisent British Columbia
Inc. were placed in escrow to secure this indemnification obligation. On April
17, 2001, the parties entered into a settlement and release agreement whereby we
paid cash of $110,000 and issued 110,000 shares of Axeda common stock to Corum
totaling approximately $0.3 million in full settlement of the matter and the
action was dismissed. The amount of the settlement was accrued in full as
of March 31, 2001 and all of the shares that were placed in escrow to indemnify
us for this liability were returned to us in September 2001. The settlement
agreement provided that if a registration on Form S-3 was not filed by August 7,
2001 and every 45-day interval thereafter, then Corum could make a claim for an
additional 15,000 shares of Axeda common stock. As the S-3 was not filed until
December 5, 2001, Corum made a claim for such additional 30,000 shares, as
provided in the settlement agreement. The S-3 was filed on December 5, 2001 and
the shares were registered. In September 2001 upon the resolution of the escrow,
we recorded the balance of the settlement for the additional 30,000 shares of
$44,100.
77
d) Employment Agreements
We have entered into employment agreements with certain of our officers and
employees. The agreements are generally for two to three-year periods, generally
provide for annual salaries and bonuses, guaranteed bonuses, incentive and
nonqualified stock options, as determined by the board of directors and
covenants not-to-compete during the employment term and for one year thereafter.
The employment agreements also generally provide for severance benefits of six
month's to one year's salary and health insurance coverage in the event the
individual is terminated under the terms of the agreements. The aggregate amount
payable for salaries in the event of employee severance totals approximately
$2.3 million as of December 31, 2002.
17) Business Risks and Credit Concentration
Axeda markets its DRM solutions worldwide to the service operation of
device original equipment manufacturers (OEMs) and strategic large-scale end
users in a variety of industries including the industrial and building
automation, high-technology devices, medical instrumentation, office automation
and semiconductor equipment industries.
We perform ongoing credit evaluations of our customers' financial
condition and generally no collateral is required. We had three customers
representing, in the aggregate, 19% and 26% of accounts receivable at December
31, 2002 and 2001, respectively.
Geographic Areas
Long-lived assets, at cost, consisting principally of furniture and
equipment, were located in the following countries, including our country of
domicile, the U.S., for the following years noted (in thousands):
Country December 31,
- --------------- -------------------------------
2002 2001 2000
---- ---- ----
United States $3,919 $2,994 $4,844
Canada ....... -- -- 79
France ....... 369 113 --
Germany ...... 10 -- 643
Israel ....... 195 240 --
Japan ........ 89 64 --
Holland ...... 109 79 --
United Kingdom -- 5 --
---- ---- ----
Total ........ $4,691 $3,495 $5,566
====== ====== ======
78
18) Income Taxes
The provision for income taxes (benefit) is as follows (in thousands):
Years ended December 31,
---------------------------------
2002 2001 2000
-------- -------- --------
Federal $(668) $ 668 $--
State -- 55 --
Foreign 209 400 40
--- --- --
Total $(459) $1,123 $40
===== ====== ===
The table below reconciles the U.S. federal statutory income taxes to the
recorded provision for income taxes (benefit) (in thousands):
December 31,
----------------------------------------
2002 2001 2000
------------- ----------- --------------
Federal income tax expense (benefit) at U.S.
federal statutory rate ............................ $(17,811) $ 864 $(13,745)
State income tax benefit, net of federal
income tax expense (benefit) ...................... (1,539) (656) (1,966)
In-process research and development expenses
and goodwill ...................................... 6,702 6,560 2,221
Foreign income taxes ............................... 209 400 40
Warrant and option expense ......................... 419 1,162 (1,271)
Non-deductible acquisition costs ................... -- 630 --
Change in valuation allowance ...................... 20,835 (3,045) 13,047
Benefit related to change in tax legislation ....... (668) -- --
Acquired deferred tax assets, including provision ..
to return adjustments (8,518) (4,526) --
Other .............................................. (88) (266) 1,714
-------- ------- --------
$ (459) $ 1,123 $ 40
======== ======= ========
The components of the net deferred tax assets (liabilities) as of December
31, 2002 and 2001, consist of the following (in thousands):
December 31,
-----------------------------
2002 2001
------------ --------------
Deferred tax assets:
Net operating losses ......................... $ 40,234 $ 22,283
Reserves and accruals not currently deductible 727 214
Depreciation and amortization ................ (476) (189)
Deferred compensation and other .............. 5,048 2,390
----- -----
45,533 24,698
Valuation allowance .......................... (45,533) (24,698)
------- -------
Net deferred tax assets ...................... $ -- $ --
======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of our ability to realize the benefit of the deferred tax
assets, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2002 and 2001.
79
As of December 31, 2002, we have approximately $99.1 million of federal and
$73.2 million of state net operating loss carryforwards available to offset
future taxable income. The federal carryforwards will begin expiring in 2011 and
the state carryforwards will begin expiring in 2006, respectively, if not
utilized. Approximately $42.4 million of the state net operating loss
carryforwards is subject to a $2 million annual limitation. In addition, we have
approximately $6 million of foreign net operating loss carryforwards of which
approximately $1.7 million begins to expire in 2006 with the remaining amounts
carried forward indefinitely.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to our prior and recent transactions, our net operating loss
carry forwards are subject to an annual limitation. Any unused annual limitation
may be carried forward to future years for the balance of the net operating loss
carryforward period. We have not yet determined the limitation as defined by the
Act. Additionally, because U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes, we may not be able to take
full advantage of these attributes for Federal income tax purposes.
Additionally, approximately $2.3 million of the gross deferred tax assets
will reduce goodwill to the extent such assets are realized and a portion of the
gross deferred tax assets will reduce equity to the extent such assets are
realized.
Subsequent to December 31, 2001, the Job Creation and Worker Assistance Act
of 2002 was enacted. The Act allows net operating loss carryforwards to 2001 and
2002 tax years to offset 100% of alternative minimum taxable income.
Accordingly, we did not owe federal alternative minimum tax liability for 2001
and, in 2002, we received a refund of alternative minimum taxes paid in 2001. We
recorded this tax benefit of approximately $668,000 in the first quarter of
2002.
19) Defined Contribution Plan
We have a defined contribution plan for qualified employees as defined in
the plan. Participants may contribute up to 20% of pre-tax compensation, as
defined. Under the plan, we can make discretionary contributions. In addition,
in December 2001, we assumed the defined contribution plan of eMation, Ltd. (the
eMation plan) (note 4a). Both plans are Internal Revenue Code section 401(k)
plans. Both plans provide for employer matching contributions for all
participants equal to 50% of salary reductions of up to 6% of a participant's
compensation. During 2001 and prior to the acquisition, eMation paid its
matching contribution to the plan. We paid matching contributions totaling $0.3
million for both plans in 2002.
80
20) Segment and Major Customer Information
We operate in a single industry segment, which is the development and
licensing of our technology.
We had the following customers that combined represented in excess of 28%,
37% and 49% of revenues for the years ended December 31, 2002. 2001 and 2000,
respectively (in thousands):
December 31,
------------------------------------------
Customer 2002 2001 2000
- -------- ------------ ----------- -------------
1 $2,512 $1,250 $4,019
2 $1,823 $ 990 $3,900
3 $ 694 $ 585 $2,292
We sell and license our technology to customers primarily in North America,
Europe and Asia A majority of our revenues are derived from our North American
operations, and our total revenues were derived from the following geographic
regions (in thousands):
Year Ended December 31,
----------------------------
Country/ Geographic Region 2002 2001 2000
- -------------------------- ---- ---- ----
North America:
United States .............. $ 8,459 $4,461 $ 9,235
Canada ..................... 1,912 1,208 2,972
---- ---- ----
Total - North America . 10,371 5,669 12,207
---- ---- ----
Europe:
Italy ...................... 247 4 2,312
Germany .................... 1,330 525 878
France ..................... 1,778 419 75
Netherlands ................ 785 -- --
Switzerland ................ 707 -- --
United Kingdom ............. 466 -- --
Turkey ..................... -- 6 62
Spain ...................... 45 1 20
Other ...................... 686 412 51
---- ---- ----
Total - Europe ........ 6,044 1,367 3,398
---- ---- ----
Asia-Pacific:
China ...................... 32 76 --
Israel ..................... 450 42 --
Japan ...................... 856 390 841
Taiwan ..................... -- -- 4,020
Other ...................... 229 30 --
---- ---- ----
Total - Asia-Pacific .. 1,567 538 4,861
---- ---- ----
South America - Other ........... 147 15 383
Australia and New Zealand - Other -- -- 5
---- ---- ----
Total ........................... $18,129 $7,589 $20,854
======= ====== =======
21) Segment Reporting
Segment information is presented in accordance with Statement of Financial
Account Standards No. 131 ("SFAS 131"), "Disclosures About Segments Of An
Enterprise And Related Information." This standard requires segmentation based
upon our internal organization and disclosure of revenue and operating income
based upon internal accounting methods. For the year ended December 31, 2002 we
had three reportable segments: device relationship management ("DRM") (note 4a),
personal computer ("PC") (note 6) and Internet appliance ("IA") (note 5b). In
2001 we had one additional segment, consumer electronics ("CE") (note 5a).
DRM: Created as a result of the acquisition of eMation in December 2001 (note
4), this segment provides a distributed software solution designed to enable
businesses to remotely monitor, manage and service intelligent devices. DRM
enables the live exchange of information via the Internet, between remotely
deployed "intelligent devices" (instruments, equipment, machines, facilities,
appliances, sensors or systems incorporating computer-based control technology)
and the people that build, service and use them. The Axeda DRM System enables
manufacturers and service providers to use the Internet to establish and manage
continuous connections with devices deployed at their customers' facilities,
allowing them to stay in touch with their products throughout their lifecycle,
tapping the value of remote device information with new, automated e-service,
operations monitoring, and e-commerce offerings. The product offerings enable
customers to gain business insight and benefits from live information sources by
helping them capitalize on the wealth of previously unavailable device
performance and usage data.
81
PC: This segment designed, developed, licensed and marketed core-based modular
software solutions that enabled digital video and audio stream management in PC
systems. The segment also provided supporting hardware designs to selected
customers as well as customization services and customer support. The segment's
solutions enabled decoding (playback) and encoding (recording) of multimedia
formats such as digital versatile disk (DVD); direct broadcast satellite (DBS)
and high-definition television (HDTV) on existing personal computers (note 6).
IA: Our Internet technology segment was involved in the development of products
for the emerging market in information appliances. The segment sold IA hardware
reference designs and software technology through intellectual property licenses
and agreements with Internet service providers. This segment provided us with a
number of Internet-related products, including an efficient web browser, and
several IA reference designs including a Web Pad design, Internet ready TV and
monitor designs and an Internet-ready screenphone (note 5b).
CE: This segment designed, developed, licensed and marketed core-based modular
software solutions that enable digital video and audio stream management in CE
devices. The segment also provided supporting hardware designs to selected
customers as well as customization services and customer support. The segment's
solutions enabled decoding (playback) and encoding (recording) of multimedia
formats such as digital versatile disk (DVD); direct broadcast satellite (DBS)
and high-definition television (HDTV) on existing CE platforms (note 5a).
We evaluate operating segment performance based on revenue and gross profit. We
have not historically evaluated segment performance based on operating income or
allocated assets to our individual operating segments.
Year Ended December 31,
--------------------------------------------
2002 2001 2000
-------------- --------------- -------------
(In thousands)
Revenues:
DRM ............................... $10,876 $1,614 $ --
PC ................................ 5,068 4,534 11,739
CE ................................ -- 421 1,614
IA ................................ 2,185 1,020 7,501
----- ----- -----
Total ........................ $18,129 $7,589 $20,854
======= ====== =======
Gross profit:
DRM ............................... $ 4,075 $1,177 $ --
PC excluding inventory charges of . 2,865 2,925 7,359
$1.1.million for 2000
CE ................................ -- 327 1,211
IA, excluding net inventory charges
of $18.5 million and $0.6 million
for 2001 and 2000, respectively .. 899 15 1,988
----- ----- -----
Total .............................. $ 7,839 $4,444 $10,558
======= ====== =======
82
Axeda Systems Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
22) Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information:
Year Ended December 31,
------------------------------
2002 2001 2000
---- ---- ----
Cash paid during the year for:
Interest ............................................................... $ 148 $ 20 $ 33
======= ====== ======
Income taxes (refund) .................................................. (308) 308 --
======= ====== ======
Non-cash investing and financing activities:
Settlement of pre-acquisition liability related
to acquisition of eMation ............................................. 160 -- --
======= ====== ======
Fair value of 20,000 shares of Axeda common stock received in connection
with the settlement of a loan receivable .............................. 39 -- --
======= ====== ======
Issuance of warrants and options in connection with
equity transactions ................................................... 90 2,262 8,253
======= ====== ======
Amortization of deferred stock compensation ............................ 1,562 1,353 1,271
======= ====== ======
23) Selected Quarterly Financial Data (unaudited)
(in thousands, except per share amounts and stock prices)
Per Share of Common Stock
Income (Loss) Closing Stock Prices
----------------------------- ----------------------
Net Income Assuming
Revenues Gross Profit (Loss) Dilution Basic High Low
------------- ---------------- ----------------- ---------------- ------------- ----------- -----------
2002
First Quarter $ 4,640 $ 1,350 $(9,112) $ (0.34) $ (0.34) $3.86 2.15
Second Quarter (A) 3,543 1,003 (10,475) (0.39) (0.39) 3.21 1.11
Third Quarter 4,369 2,073 (6,311) (0.23) (0.23) 1.77 0.38
Fourth Quarter (B) 5,577 3,413 (26,029) (0.96) (0.96) 1.29 0.25
----- ----- -------
Total (F) (H) 18,129 7,839 (51,927) $ (1.92) * $ (1.92) *
====== ===== =======
2001
First Quarter (C) $ 2,816 $ 2,162 $39,735 $ 2.14 $ 2.28 $ 4.75 $ 1.75
Second Quarter (D) 794 (13,162) (15,950) (0.89) (0.89) 2.55 1.31
Third Quarter 841 331 (4,122) (0.22) (0.22) 2.08 1.06
Fourth Quarter (E) 3,138 (3,389) (18,236) (0.87) (0.87) 3.75 1.50
----- ----- -------
Total (G) (H) $ 7,589 $(14,058) $ 1,427 $ 0.07 * $ 0.08 *
====== ===== =======
* EPS in each quarter is computed using the weighted-average number of
shares outstanding that quarter while EPS for the year is computed using the
weighted-average number of shares outstanding during the year. Thus, the sum of
the four quarters' EPS may not equal the full-year EPS.
83
Notes to Selected Quarterly Financial Data (unaudited)
Axeda's net income (loss) per common share in 2002 and 2001 has been
affected by certain unusual or infrequently occurring items. These items
consisted of:
A. Second quarter 2002
1) special charges related to exit from PC business of $0.8 million (note
6)
B. Fourth quarter 2002
1) an impairment charge of $17.1 million for goodwill related to the
acquisition of eMation (note 1g)
2) an impairment charge of $5.3 million for identified intangible assets
related to the acquisition of eMation (note 1g)
3) settlement of an aggregate vendor liability of $1.0 million for $0.5
million
C. First quarter 2001
1) gain on sale of assets of CE business of $47.5 million (notes 5a and 5c)
2) gain on sale of assets of IA business of $4.5 million (notes 5b and 5c)
3) non-cash charges of $1.2 million to write off balances of prepaid and
deferred stock compensation no longer subject to vesting
4) a charge of $1.8 million related to the settlement of a distribution
rights agreement, net of $0.4 million for the fair value of the warrant issued
to the distributor that was canceled (notes 1f and 16c)
D. Second quarter 2001
1) inventory charges of $13.4 million
2) doubtful account charges of $0.7 million for accounts related to the IA
business, certain assets of which were sold in March 2001 (notes 5b and 5c)
E. Fourth quarter 2001
1) inventory charges of $5.1 million, net of warranty write-off of $(0.3)
million
2) IPR&D charge of $3.1 million for the acquisition of eMation (note 4a)
3) an impairment charge of $2.2 million for goodwill related to the
acquisition of Cinax (notes 1f and 4b)
4) an impairment charge of $1.7 million for acquired technology rights
(notes 1g and 14)
5) non-capitalizable acquisition-related costs of $0.9 million for the
acquisition of eMation related to branding and marketing fees
F. The aggregate net effect of these items in 2002 was to increase basic
and diluted net loss per share by $0.03 in the second quarter and $0.80 in the
fourth quarter, thereby aggregating net loss of $1.00 per basic common and
diluted share outstanding for the year (see Note (H) below).
G. The aggregate net effect of these items in 2001 was to increase basic
and diluted net income per common share by $2.81 and $2.64, respectively, in the
first quarter; increases basic and diluted net loss per share by $0.79 in the
second quarter and $0.65 in the fourth quarter, thereby aggregating net income
of $1.37 per basic common and $1.19 per diluted common share outstanding for the
year (see Note (H) below).
H. Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the annual
amounts because of differences in the average common shares outstanding during
each period and, with regard to diluted per common share amounts only, because
of the inclusion of the effect of potentially dilutive securities only in the
periods in which such effect would have been dilutive.
84
Axeda Systems Inc.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
85
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to our Proxy
Statement for the 2003 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2003 under the
captions "Election of directors", "Security Ownership of Certain Beneficial
Owners and Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to our Proxy
Statement for the 2003 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2003 under the
caption "Executive Compensation."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is incorporated by reference to our Proxy
Statement for the 2003 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2003 under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Equity Compensation Plan Information."
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to our Proxy
Statement for the 2003 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2003 under the
caption "Certain Transactions."
ITEM 14. Controls And Procedures
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated
under the Securities Exchange Act of 1934) are effective.
b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
86
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Documents filed as a part of this Report
1) Consolidated Financial Statements
The Consolidated Financial Statements of Axeda Systems Inc. and
related Notes thereto as set forth in Item 8 of this Annual Report on
Form 10-K begin at page 46.
2) Financial Statement Schedules
Report of Independent Auditors
The Board of Directors and Stockholders
Axeda Systems Inc.:
Under date of February 3, 2003, we reported on the consolidated balance sheets
of Axeda Systems Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2002. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule. The consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, Axeda Systems
Inc. adopted Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.
KPMG LLP
Philadelphia, Pennsylvania
February 3, 2003
87
The following consolidated financial statement schedule of Axeda Systems
Inc. for each of the years ended December 31, 2000, 2001 and 2002 should be read
in conjunction with the Consolidated Financial Statements and related Notes
thereto contained herein at Item 8.
Axeda Systems Inc. and Subsidiaries
Schedule of Valuation and Qualifying Accounts
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to
beginning of cost and other Balance at
year expense accounts Deductions end of year
------------ ------------ ------------- ------------- ---------------
Accounts receivable reserve
- ---------------------------
For the year ended December 31, 2000 $ 319 $ 4,966 $ -- $ (2,880) $ 2,405
For the year ended December 31, 2001 $ 2,405 $ 929 $ -- $ (3,155) $ 179
For the year ended December 31, 2002 $ 179 $ (45) $ -- $ (50) $ 84
Inventory reserves
- ---------------------------
For the year ended December 31, 2000 $ 556 $ 1,708 $1,600 $ (64) $ 3,800
For the year ended December 31, 2001 $ 3,800 $ 18,783 $ -- $ (1,264) $21,319
For the year ended December 31, 2002 $21,319 $ -- $ -- $(18,127) $ 3,192
Schedules other than the one listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto contained in this Annual
Report on Form 10-K.
3) Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
b) Current reports on Form 8-K during the quarter ended December 31, 2002.
On December 9, 2002 the Registrant filed a Form 8-K to announce that the
escrow period for the shares of Axeda Systems Inc. placed in escrow at the
closing of the eMation Ltd. acquisition has been extended until up to February
7, 2003 pursuant to a November 29, 2002 addendum to the December 7, 2001 escrow
agreement entered into by and among the Axeda Systems Inc., Axeda Systems Ltd.
(formerly eMation Ltd.), State Street Bank and Trust Company of California,
N.A., as escrow agent and Oren Zeev, as shareholders' agent.
On November 26, 2002 the Registrant filed a Form 8-K to announce that on
November 19, 2002, the Company received confirmation from the Nasdaq Stock
Market, Inc. that the closing bid price of our common stock had been at $1.00
per share or greater for at least 10 consecutive trading days. Accordingly, we
regained compliance with Nasdaq's minimum bid price per share ($1.00)
requirement for continued listing on the Nasdaq National Market, and the Nasdaq
Stock Market, Inc. has now closed this matter.
On November 8, 2002 the Registrant filed a Form 8-K to announce that on
November 8, 2002, Axeda Systems Inc. submitted the certification required
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 in connection with its
Form 10-Q for the quarterly period ended September 30, 2002.
On October 18, 2002 the Registrant filed a Form 8-K to announce that on
October 17, 2002, Axeda Systems Inc. mailed a letter to its shareholders
describing recent business highlights, product advancements and a notification
received from NASDAQ, which stated that the closing bid price of our common
stock had been below $1.00 per share over the previous 30 consecutive trading
days.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Mansfield, Commonwealth of Massachusetts on this 3rd day of March 2003.
Axeda Systems Inc.
March 3, 2003
By: /s/ Robert M. Russell Jr.
-----------------
Robert M. Russell Jr.
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report has been signed by the persons whose signatures appear below,
which persons have signed such Annual Report in the capacities and on the dates
indicated.
Signature Title Date
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ Robert M. Russell Jr. Chief Executive Officer and Chairman of the Board March 3, 2003
- -------------------------
Robert M. Russell Jr. (Principal Executive Officer)
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ Dale E. Calder Director and President March 3, 2003
Dale E. Calder
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ Thomas J. Fogarty Chief Financial Officer, Executive Vice President and March 3, 2003
Thomas J. Fogarty Treasurer
(Principal Financial and Accounting Officer)
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/Paul A. Vais Director March 3, 2003
Paul A. Vais
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ Walter L. Threadgill Director March 3, 2003
Walter L. Threadgill
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ Bruce J. Ryan Director March 3, 2003
Bruce J. Ryan
- ------------------------------------- ----------------------------------------------------------- -----------------------
/s/ James McDonald Director March 3, 2003
James McDonald
- ------------------------------------- ----------------------------------------------------------- -----------------------
89
AXEDA SYSTEMS INC.
CERTIFICATIONS
I, Robert M. Russell Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Axeda Systems Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 3, 2003 /s/ Robert M. Russell Jr.
-------------------------
Robert M. Russell Jr.
Chief Executive Officer
90
AXEDA SYSTEMS INC.
CERTIFICATIONS
I, Thomas J. Fogarty, certify that:
1. I have reviewed this annual report on Form 10-K of Axeda Systems Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 3, 2003 /s/ Thomas J. Fogarty
---------------------
Thomas J. Fogarty
Executive Vice President and
Chief Financial Officer
91
EXHIBITS
- ----------------------------------------------------------------------------------------------------------
Exhibit Number Exhibit Title
- ---------------- -----------------------------------------------------------------------------------------
2.1 Asset Acquisition Agreement dated as of January 18, 2001 among STMicroelectronics,
Inc., STMicroelectronics, NV and RAVISENT Technologies Inc., RAVISENT I.P., Inc. and
RAVISENT Operating Company, Inc. (7)
- ---------------- -----------------------------------------------------------------------------------------
2.2 Asset Acquisition Agreement dated as of March 21, 2001 among Phoenix Technologies Ltd.
and RAVISENT Internet Appliance Group, Ravisent I.P., Inc. and RAVISENT Operating
Company, Inc. (8)
- ---------------- -----------------------------------------------------------------------------------------
2.3 Amended and Restated Share Purchase Agreement dated as of October 5, 2001 by and among
RAVISENT Technologies Inc., a Delaware corporation, eMation, Ltd., a private company
organized under the laws of the State of Israel and certain of the shareholders of
eMation, Ltd. (12)
- ---------------- -----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
- ---------------- -----------------------------------------------------------------------------------------
3.2 Bylaws of Axeda Systems Inc., as amended by the Board of Directors on February 22,
2002. (14)
- ---------------- -----------------------------------------------------------------------------------------
3.3 Certificate of Ownership and Merger of Axeda Systems Inc., a Delaware corporation with
and into Ravisent Technologies Inc., a Delaware corporation, dated as of January 10,
2002. (17)
- ---------------- -----------------------------------------------------------------------------------------
4.1 Form of registrant's Specimen Common Stock Certificate. (1)
- ---------------- -----------------------------------------------------------------------------------------
4.2 Registration Rights Agreement dated April 30, 1998, by and among RAVISENT and parties
listed on Schedule A therein. (1)
- ---------------- -----------------------------------------------------------------------------------------
4.3 Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30,
1998, by and between RAVISENT and Progress Capital, Inc. for the purchase of up to
75,000 shares of common stock.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.4 Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30,
1998, by and between RAVISENT and Progress Capital, Inc. for the purchase of up to
200,000 shares of common stock.(1)
- --------------- ------------------------------------------------------------------------------------------
4.5 Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30,
1998, by and between RAVISENT and Progress Capital, Inc. for the purchase of up to
100,000 shares of common stock.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.6 Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated June 11,
1996, by and between RAVISENT and Meridian Bank.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.7 Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated March 15,
1996, by and between RAVISENT and Meridian Bank.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.8 Quadrant International, Inc. Convertible Debenture and Warrant Purchase Agreement,
dated April 7, 1998, by and between RAVISENT and the parties who are signatories
thereto.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.9 Convertible Debenture and Warrant Purchase Agreement, dated March 31, 1998, by and
among RAVISENT and the parties who are signatories thereto.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.10 Convertible Promissory Note Purchase Agreement, dated as of April 26, 1999, among
RAVISENT and the parties who are signatories thereto.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.11 Registration Rights Agreement, dated as of April 26, 1999, among RAVISENT and the
parties listed on Schedule A thereto.(1)
- ---------------- -----------------------------------------------------------------------------------------
4.12 Revolving Demand Note, dated July 21, 1999 from Divico, Inc. in favor of Liuco, Inc. (4)
- ---------------- -----------------------------------------------------------------------------------------
10.1 RAVISENT's 1999 Stock Incentive Plan.(1)
- ---------------- -----------------------------------------------------------------------------------------
10.2 RAVISENT's 1999 Employee Stock Purchase Plan.(1)
- ---------------- -----------------------------------------------------------------------------------------
10.3 Form of Directors' and Officers' Indemnification Agreement.(1)
- ---------------- -----------------------------------------------------------------------------------------
10.4 Letter Agreement, dated October 28, 1997, by and between RAVISENT and Dell Products,
L.P. (1)
- ---------------- -----------------------------------------------------------------------------------------
10.5 Form of Software License Agreement.(1)
- ---------------- -----------------------------------------------------------------------------------------
10.6 Intangible Property License Agreement, dated July 21, 1999 by and between DVA, Inc. and
Divico, Inc. (4)
- ---------------- -----------------------------------------------------------------------------------------
10.7 Tax Sharing Agreement, dated July 21, 1999, by and between RAVISENT and its
subsidiaries, Liuco, Inc., and Divico, Inc. (4)
- ---------------- -----------------------------------------------------------------------------------------
10.8 Assignment of Intellectual Property Rights, dated July 21, 1999, from RAVISENT to DVA,
Inc. (4)
- ---------------- -----------------------------------------------------------------------------------------
10.9 Bill of Sale, Assignment and Assumption Agreement, dated July 21, 1999, between
RAVISENT and Divico, Inc. (4)
- ---------------- -----------------------------------------------------------------------------------------
92
10.10+ Employment Agreement, dated May 10, 2001 by and between RAVISENT and Ned E. Barlas.
(10)
- ---------------- -----------------------------------------------------------------------------------------
10.11+ Employment Agreement, as amended, dated August 6, 2001 by and between RAVISENT and
Robert M. Russell, Jr. (11)
- ---------------- -----------------------------------------------------------------------------------------
10.12+ Employment Agreement, dated December 7, 2001 by and between RAVISENT and Dale Calder
(15)
- ---------------- -----------------------------------------------------------------------------------------
10.13+ Employment Agreement, dated December 7, 2001 by and between RAVISENT and Thomas J.
Fogarty (15)
- ---------------- -----------------------------------------------------------------------------------------
10.14+ Employment Agreement, dated December 7, 2001 by and between RAVISENT and Francis X.
Brown III (15)
- ---------------- -----------------------------------------------------------------------------------------
10.15+ Employment Agreement, dated December 7, 2001 by and between RAVISENT and Paul
Henderson (15)
- ---------------- -----------------------------------------------------------------------------------------
10.16 eMation Ltd. 2001 Share Incentive Plan.(13)
- ---------------- -----------------------------------------------------------------------------------------
10.17 eMation Ltd. 2001 Share Incentive Plan Form of Stock Option Agreement.(13)
- ---------------- -----------------------------------------------------------------------------------------
10.18 Form of Assumption Agreement. (13)
- ---------------- -----------------------------------------------------------------------------------------
10.19@ License and Distribution Agreement, dated July 26, 2002, by and between Electronics for
Imaging, Inc. and Axeda Systems Operating Company, Inc. (16)
- ---------------- -----------------------------------------------------------------------------------------
10.20+ Employment Agreement, dated January 10, 2002 by and between RAVISENT and John Roberts.
(17)
- ---------------- -----------------------------------------------------------------------------------------
10.21+ Employment Agreement, dated January 2, 2002 by and between RAVISENT and Rich McNeal.
(18)
- ---------------- -----------------------------------------------------------------------------------------
10.22@ Software Distribution Agreement, dated May 24, 2002, by and between Sonic IP, Inc. and
AXEDA SYSTEMS, Inc., RAVISENT I.P., Inc and RAVISENT OPERATING COMPANY, Inc. (19)
- ---------------- -----------------------------------------------------------------------------------------
21.1* Subsidiaries of AXEDA.
- ---------------- -----------------------------------------------------------------------------------------
23.1* Consent of KPMG LLP, Independent Auditors.
- ---------------- -----------------------------------------------------------------------------------------
(1) Incorporated by reference to The registrant's registration statement on Form S-1
declared effective with Securities and Exchange Commission on July 15, 1999 (File NO.
333-77269).
- ---------------- -----------------------------------------------------------------------------------------
(2) Incorporated by reference to the registrant's quarterly report on Form 10-Q for the
quarterly period ended September 30, 1999.
- ---------------- -----------------------------------------------------------------------------------------
(3) Incorporated by reference to the registrant's current
report on Form 8-K dated November 8, 1999, as filed with
the Securities and Exchange Commission on November 22, 1999
(File No. 00-26287).
- ---------------- -----------------------------------------------------------------------------------------
(4) Incorporated by reference to the registrant's annual report on Form 10-K for the period
ended December 31, 1999.
- ---------------- -----------------------------------------------------------------------------------------
(5) Incorporated by reference to the registrant's quarterly report on Form 10-Q for the
quarterly period ended June 30, 2000.
- ---------------- -----------------------------------------------------------------------------------------
(6) Incorporated by reference to exhibit 99 to the registrant's quarterly report on Form
10-Q for the quarterly period ended September 30, 2000.
- ---------------- -----------------------------------------------------------------------------------------
(7) Incorporated by reference the registrant's current report
on Form 8-K dated March 1, 2001, as filed with the
Securities and Exchange Commission on March 16, 2001.
- ---------------- -----------------------------------------------------------------------------------------
(8) Incorporated by reference to the registrant's current
report on Form 8-K dated March 23, 2001, as filed with the
Securities and Exchange Commission on April 9, 2001.
- ---------------- -----------------------------------------------------------------------------------------
(9) Incorporated by reference to the registrant's annual report on Form 10-K for the period
ended December 31, 2000.
- ---------------- -----------------------------------------------------------------------------------------
(10) Incorporated by reference to the registrant's quarterly report on Form 10-Q for the
quarterly period ended June 30, 2001.
- ---------------- -----------------------------------------------------------------------------------------
(11) Incorporated by reference to the registrant's quarterly report on Form 10-Q for the
quarterly period ended September 30, 2001.
- ---------------- -----------------------------------------------------------------------------------------
(12) Incorporated by reference to the registrant's Definitive Proxy Statement on Form 14A
dated November 9, 2001, as filed with the Securities and Exchange Commission on
November 19, 2001.
- ---------------- -----------------------------------------------------------------------------------------
(13) Incorporated by reference to Axeda's registration statement on Form S-8 as filed with
the Securities and Exchange Commission on February 11, 2002.
- ---------------- -----------------------------------------------------------------------------------------
(14) Incorporated by reference to Axeda's current report on Form 8-K dated February 25, 2002
as filed with the Securities and Exchange Commission on February 27, 2002.
- ---------------- -----------------------------------------------------------------------------------------
93
(15) Incorporated by reference to the registrant's annual report on Form 10-K for the period
ended December 31, 2002.
- ---------------- -----------------------------------------------------------------------------------------
(16) Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
period ended September 30, 2002.
- ---------------- -----------------------------------------------------------------------------------------
(17) Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
period ended March 31, 2002.
- ---------------- -----------------------------------------------------------------------------------------
(19) Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
period ended June 30, 2002.
- ---------------- -----------------------------------------------------------------------------------------
@ Confidential treatment granted for portions of this agreement
- ---------------- -----------------------------------------------------------------------------------------
+ Compensation plans and arrangements for executives and others
- ---------------- -----------------------------------------------------------------------------------------
* Filed herewith
94