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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period Ended June 30, 2003
[_] 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
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No o
---------------------------
On August 13, 2003, 27,327,578 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
AXEDA SYSTEMS INC.
FORM 10-Q
INDEX
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 2
Consolidated Statements of Operations for the three months ended June 30, 2003 and 2002 3
(unaudited).
Consolidated Statements of Operations for the six months ended June 30, 2003 and 2002 4
(unaudited).
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 5
(unaudited).
Notes to the Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 33
Item 4 Controls and Procedures 33
Part II Other Information
Item 1 Legal Proceedings 34
Item 2 Changes in Securities 35
Item 3 Defaults Upon Senior Securities 35
Item 4 Submission of Matters to a Vote of Security Holders 36
Item 5 Other Information 36
Item 6 Exhibits and Reports on Form 36
8-K
Signatures 37
Exhibit Index 38
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
1
AXEDA SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
June 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $100 in 2003 and $650 in 2002.... $ 7,760 $ 19,065
Accounts receivable, net....................................... 3,099 3,305
Prepaid expenses and other current assets.............................................. 752 973
--- ---
Total current assets....................................................... 11,611 23,343
Furniture and equipment, net................................................. 2,673 3,111
Goodwill............................................................................ 3,640 3,651
Identified intangible assets, net............................................ 1,755 2,087
Other assets ................................................................ 313 321
--- ---
Total assets............................................................... $ 19,992 $ 32,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit................................ $ 367 $ -
Current portion of notes payable............................................. 109 238
Accounts payable............................................................. 1,572 2,448
Accrued expenses ............................................................ 5,216 8,015
Income taxes payable......................................................... 718 616
Deferred revenue............................................................. 899 1,078
--- -----
Total current liabilities.................................................. 8,881 12,395
Non-current liabilities:
Notes payable, less current portion, and other non-current liabilities 1,000 1,046
----- -----
Total liabilities...................................................... 9,881 13,441
----- ------
Commitments and contingencies (note 6)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized in 2003 and 2002, none
issued or outstanding.................................... - -
Common stock, $.001 par value 50,000,000 authorized; 27,871,588 shares issued in 2003
and 27,822,217 in 2002................................. 28 28
Additional paid-in capital................................................... 144,229 143,847
Deferred stock compensation.................................................. (317) (578)
Accumulated deficit.......................................................... (132,518) (122,880)
Accumulated other comprehensive income....................................... 69 35
Treasury stock at cost, 603,800 shares in 2003 and 2002...................... (1,380) (1,380)
------- -------
Total stockholders' equity............................................................ 10,111 19,072
------ ------
Total liabilities and stockholders' equity.......................... $ 19,992 $ 32,513
======== ========
See accompanying notes to the consolidated financial statements.
2
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended June 30,
2003 2002
---- ----
Revenues:
License ................................................................. $ 2,158 $ 2,578
Services and maintenance ................................................ 570 674
Hardware ................................................................ 46 291
------------ ------------
Total revenues ........................................................ 2,774 3,543
------------ ------------
Cost of revenues:
License ................................................................. 314 782
Services and maintenance ................................................ 1,025 990
Hardware ................................................................ 1 243
Software amortization ................................................... 159 525
------------ ------------
Total cost of revenues ................................................ 1,499 2,540
------------ ------------
Gross profit .......................................................... 1,275 1,003
------------ ------------
Research and development
Non-cash compensation ................................................... 28 34
Other research and development expense .................................. 1,407 2,090
Sales and marketing
Non-cash compensation ................................................... 6 19
Other selling and marketing expense ..................................... 2,276 4,990
General and administrative
Non-cash compensation ................................................... 170 239
Other general and administrative expense ................................ 1,956 3,009
Depreciation and amortization ........................................... 262 330
Special charges ......................................................... -- 820
------------ ------------
Total operating expenses .............................................. 6,105 11,531
------------ ------------
Operating loss ........................................................ (4,830) (10,528)
Loss on disposals of assets ............................................... -- (37)
Interest income (expense), net ............................................ 22 93
Other income (expense), net ............................................... -- (3)
------------ ------------
Loss before provision for income taxes .................................... (4,808) (10,475)
Provision for income taxes ........................................... 45 --
------------ ------------
Net loss .................................................................. $ (4,853) $ (10,475)
============ ============
Basic and diluted net loss per weighted average common share outstanding .. $ (0.18) $ (0.39)
============ ============
Weighted average number of common shares outstanding used in calculation of
basic and diluted net loss per common share ............................... 27,245,700 26,986,387
============ ============
See accompanying notes to the consolidated financial statements.
3
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Revenues:
License ................................................................. $ 4,475 $ 5,618
Services and maintenance ................................................ 1,533 1,217
Hardware ................................................................ 183 1,348
------------ ------------
Total revenues ........................................................ 6,191 8,183
------------ ------------
Cost of revenues:
License ................................................................. 825 1,817
Services and maintenance ................................................ 2,037 1,707
Hardware ................................................................ 1 1,252
Software amortization ................................................... 316 1,054
------------ ------------
Total cost of revenues ................................................ 3,179 5,830
------------ ------------
Gross profit .......................................................... 3,012 2,353
------------ ------------
Research and development
Non-cash compensation ................................................... 56 98
Other research and development expense .................................. 3,121 4,322
Sales and marketing
Non-cash compensation ................................................... 17 38
Other selling and marketing expense ..................................... 4,781 9,792
General and administrative
Non-cash compensation ................................................... 273 1,099
Other general and administrative expense ................................ 4,517 6,072
Depreciation and amortization ........................................... 570 640
Special charges ........................................................ -- 820
------------ ------------
Total operating expenses .............................................. 13,335 22,881
------------ ------------
Operating loss ........................................................ (10,323) (20,528)
Gain (loss) on disposals of assets ........................................ 743 (37)
Interest income (expense), net ............................................ 53 313
Other income (expense), net ............................................... (18) (3)
------------ ------------
Loss before provision for income taxes (benefit) .......................... (9,545) (20,255)
Provision for income taxes (benefit) ................................. 95 (668)
------------ ------------
Net loss .................................................................. $ (9,640) $ (19,587)
============ ============
Basic and diluted net loss per weighted average common share outstanding .. $ (0.35) $ (0.73)
============ ============
Weighted average number of common shares outstanding used in calculation of
basic and diluted net loss per common share ............................... 27,212,652 26,888,325
============ ============
See accompanying notes to the consolidated financial statements.
4
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss .................................................................. $ (9,640) $(19,587)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 886 1,694
Net (gains) and losses on disposal of assets .............................. (729) 371
Non-cash compensation ..................................................... 346 1,220
Provision for doubtful accounts ........................................... (16) 68
Changes in items affecting operations:
Accounts receivable ....................................................... 222 965
Inventories ............................................................... -- 2,045
Loan receivable--officer .................................................. -- 34
Prepaid expenses and other current assets ................................. 265 583
Goodwill, intangible assets and other assets .............................. 19 (224)
Accounts payable .......................................................... (876) (1,582)
Accrued expenses and other non-current liabilities ........................ (1,803) (861)
Income taxes payable ...................................................... 102 (668)
Deferred revenue .......................................................... (179) 1,842
-------- --------
Net cash used in operating activities ................................... (11,403) (14,100)
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (101) (797)
-------- --------
Net cash used in investing activities ................................... (101) (797)
-------- --------
Cash flows from financing activities:
Borrowing under bank line of credit ....................................... 367 --
Repayments of long-term debt and other non-current liabilities ............ (175) (1,893)
Net proceeds from exercise of stock options .............................. 1 53
-------- --------
Net cash provided by (used in) financing activities ..................... 193 (1,840)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ................ 6 125
-------- --------
Net decrease in cash and cash equivalents ................................... (11,305) (16,612)
Cash and cash equivalents:
Beginning of period ......................................................... 19,065 47,349
-------- --------
End of period, including restricted cash of $100 in 2003 and $1,399 in 2002 . $ 7,760 $ 30,737
======== ========
See accompanying notes to the consolidated financial statements.
5
AXEDA SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to June 30, 2003 and 2002 is unaudited)
All amounts are in thousands, except share and per share amounts, unless noted
otherwise.
1) Summary of Significant Accounting Policies
a) Description of Business and Liquidity
Axeda Systems Inc. ("we", "our", "us" or "Axeda") develops, markets and sells
enterprise 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 and France.
In December 2001 we purchased all of the outstanding capital stock of eMation,
Ltd., or eMation, a private company organized under the laws of the State of
Israel and headquartered near Boston, Massachusetts. In 2003 our revenues have
been substantially generated from selling DRM products. During 2002 our revenues
were increasingly generated from selling DRM products.
We have sustained significant net losses and negative cash flows from operations
since our inception. For the six months ended June 30, 2003 and 2002, our net
losses were $9,640 and $19,587, respectively, and negative cash flows from
operations were $11,403 and $14,100, respectively. There can be no assurances
that we will be able to generate sufficient revenues or positive cash flows from
operations necessary to achieve or sustain profitability in the short or long
term. Management believes that the current cash and cash equivalent amounts will
be sufficient to sustain our operations through at least June 30, 2004. However,
due to risks and uncertainties, there can be no assurances that our future
operating cash flows will be sufficient to meet our requirements. In such event,
our operations and liquidity will be materially adversely affected. We will
continue to pursue attractive financing and investment arrangements, and if the
capital markets present other attractive opportunities, we may seek to raise
cash through the sale of equity or issuance of debt. However, additional
financing may not be available when needed and, if such financing is available,
it may not be available on terms favorable to us.
Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our losses and
corresponding use of cash. We have halved the number of global offices, reduced
staffing levels by approximately 46%, and have closely monitored our
infrastructure costs. We exited the personal computer, or PC, business and
focused our efforts on several key markets for DRM Systems products. In 2002 and
through the second quarter of 2003, we recorded $1,900 and $1,047, respectively,
in restructuring charges to reduce staffing levels, terminate certain leases and
consolidate our operations. Combined with our expected continued year over year
growth in DRM Systems revenues, we believe that future losses will continue to
be lower than in previous quarters. We will continue to evaluate our cost
structure and may undertake additional measures to reduce expenses in the
future.
b) Basis of Presentation
The interim consolidated financial statements of Axeda for the three and six
months ended June 30, 2003 and 2002 included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments consisting
only of normal recurring items, necessary to present fairly the financial
position of Axeda at June 30, 2003, the results of our operations for the three
and six months ended June 30, 2003 and 2002 and our cash flows for the six
months ended June 30, 2003 and 2002. The unaudited consolidated financial
statements included in this Form 10-Q should be read in conjunction with the
audited consolidated financial statements and notes thereto, included in our
Form 10-K for the year ended December 31, 2002. The interim results presented
are not necessarily indicative of results for any subsequent quarter or for the
year ending December 31, 2003.
c) 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.
6
d) 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.
e) Revenue Recognition
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.
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.
Revenues related to contracts involving significant modification or
customization of 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.
Royalties representing software license fees paid on a per unit basis are
recognized when earned, which is 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 by
the end of the quarter during which the sales of the licensees' products take
place.
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").
7
f) 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.
g) 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.
At June 30, 2003 we have two stock-based employee compensation plans. 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 loss
and net loss per share if we had applied the fair value recognition provisions
of SFAS 123 to stock-based compensation:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported .................... $ (4,853) $ (10,475) $ (9,640) $(19,587)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards ........ (808) (1,215) (1,312) (2,430)
-------- ----------- -------- --------
Pro forma net loss ....................... $ (5,661) $ (11,690) $(10,952) $(22,017)
======== =========== ======== ========
Net loss per common share -- basic and
diluted:
As reported ............................ $ (0.18) $ (0.39) $ (0.35) $ (0.73)
======== =========== ======== ========
Pro forma .............................. $ (0.21) $ (0.43) $ (0.40) $ (0.82)
======== =========== ======== ========
We used the following range of assumptions to determine the fair value of stock
options granted using the Black-Scholes option-price model:
June 30,
----------------------------------
2003 2002
------------- -------------
Dividend yield ............. 0% 0%
Expected volatility ........ 0% - 192% 0% - 192%
Average expected option life 4 years 4 years
Risk-free interest rate .... 1.02% - 5.73% 1.41% - 5.73%
h) 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.
i) Computation of Earnings 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.
8
The following potential shares of common stock have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive:
i) Three Months Ended June 30, 2003
Options to purchase approximately 4.9 million shares of common stock with a
weighted-average exercise price of $1.77 were outstanding during the three
months ended June 30, 2003 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 2.5 million options
that are vested, with a weighted average exercise price of $2.33, of which 0.8
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 0.6 million shares of common stock with a
weighted-average exercise price of $2.70 were vested and outstanding during the
three months ended June 30, 2003, 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 0.3 million
warrants that are vested and in the money, with a weighted average exercise
price of $0.33. The warrants have various expiration dates during the next 5
years.
ii) Six Months Ended June 30, 2003
Options to purchase approximately 4.9 million shares of common stock with a
weighted-average exercise price of $1.77 were outstanding during the six months
ended June 30, 2003 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 2.5 million options
that are vested, with a weighted average exercise price of $2.33, of which 0.8
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 0.6 million shares of common stock with a
weighted-average exercise price of $2.70 were vested and outstanding during the
six months ended June 30, 2003, 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 0.3 million
warrants that are vested and in the money, with a weighted average exercise
price of $0.24. The warrants have various expiration dates during the next 5
years.
iii) Three Months Ended June 30, 2002
Options to purchase approximately 4.7 million shares of common stock with a
weighted-average exercise price of $2.47 were outstanding during the three
months ended June 30, 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 1.9 million options
that were exercisable, with a weighted average exercise price of $3.06, of which
1.3 million were vested and exercisable, with a weighted average exercise price
of $1.06.
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
three months ended June 30, 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 were vested and in the money, with a weighted average exercise
price of $0.28.
iv) Six Months Ended June 30, 2002
Options to purchase approximately 4.7 million shares of common stock with a
weighted-average exercise price of $2.47 were outstanding during the six months
ended June 30, 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 1.9 million options
that were exercisable, with a weighted average exercise price of $3.06, of which
1.5 million were vested and exercisable, with a weighted average exercise price
of $1.26.
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
six months ended June 30, 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 were vested and in the money, with a weighted average exercise
price of $0.28.
j) Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board, ("FASB"), issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 changes the accounting for
certain financial instruments that under previous guidance issuers could account
for as equity. It requires that those instruments be classified as liabilities
in balance sheets. The guidance in SFAS 150 is generally effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective on July 1, 2003. We do not expect the adoption of SFAS 150 to have
a material impact on our financial position, cash flows or results of
operations.
9
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149") which amends SFAS
133 for certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying to conform it to language used in FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and (4) amends certain other
existing pronouncements. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. We do not expect the adoption of SFAS 149 to have a material
impact on our financial position, cash flows or results of operations.
In March 2003 the FASB added a project to its agenda that will seek to improve
the accounting and disclosures relating to stock-based compensation, with a view
to issuing an Exposure Draft later this year that could become effective in
2004. The project will address whether compensation paid in the form of equity
instruments should be recognized in the financial statements and how that
compensation should be measured. In April 2003 the FASB decided that goods or
services received in exchange for compensation result in a cost that is
recognized in the income statement as an expense when the goods or services are
consumed by an enterprise, that the economic event being measured is the
exchange of goods or services received for stock-based compensation, that the
measurement focus of that exchange is the value of the goods or services
received, that the exchange should be measured at the grant date and that the
measurement attribute for the exchange is the fair value. The FASB believes
there is a need for one consistent approach to recognize the costs associated
with employee stock options, and also will examine whether there are ways to
improve the precision and consistency of measuring the cost of employee stock
options, as well as whether to require additional informative disclosures.
Subsequent to the April decisions by the FASB, the United States Senate
introduced proposed legislation that calls for a three-year moratorium on
mandatory expensing of stock-based compensation and directs the Securities and
Exchange Commission to call for improved disclosure on employee stock option
plans. From May to July 2003 the FASB continued to deliberate measurement and
attribution issues and measurement of stock-based compensation with
nonemployees. The FASB met with members of the Option Valuation Group on July 8,
2003 to discuss issues relating to the measurement of employee stock options,
and plans to continue deliberations on this project in the third quarter of
2003. No decisions were made at the July 8 meeting.
k) Guarantees
Our software license agreements typically provide for indemnification of
customers for intellectual property infringement claims. We also warrant to
customers, when requested, that our software products operate substantially in
accordance with standard specifications for a limited period of time. We have
not incurred significant obligations under customer indemnification or warranty
provisions historically, and do not expect to incur significant obligations in
the future. Accordingly, we do not maintain accruals for potential customer
indemnification or warranty-related obligations.
We have agreements in place with our directors and officers whereby we indemnify
them for certain events or occurrences while the officer or director is, or was,
serving at our request in such capacity. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have a director and officer insurance policy that may
enable us to recover a portion of any future amounts paid.
l) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2) Supplemental Disclosure of Balance Sheet Information
Provision for Doubtful Accounts
Accounts receivable are net of provisions for doubtful accounts of $68
and $84 as of June 30, 2003 and December 31, 2002, respectively.
Acquired Intangible Assets
Accumulated amortization at June 30, 2003 and December 31, 2002 was $405
and $73, respectively.
3) Notes Payable
As of June 30, 2003, we had approximately $109 outstanding on an equipment line
of credit with interest rates ranging from 12% to 13% and payments due monthly
over a 36 month period ending in December 2003. As of June 30, 2003, we are in
compliance with all of the covenants under the equipment line of credit.
10
4) Line of Credit
In June 2003 we executed a loan and security agreement with Silicon Valley Bank,
(the "Bank"), that provides us with a line of credit, (the "Line"), in the
amount of the lesser of $2,000 or the borrowing base, as defined (limited to a
percentage of eligible accounts receivable). The Line also provides for a
maximum of $1,000 in the form of letters of credit or other services from the
bank that reduces the amount of available borrowings under the Line. The Line
matures in June 2004, bears interest at the prime rate plus 1% (5.25% at June
30, 2003), with a minimum rate of 5.25% and is collateralized by substantially
all of our assets. We are required to comply with a tangible net worth covenant,
as defined in the loan and security agreement, and a minimum available cash
(including amounts available but undrawn under the Line) covenant. At June 30,
2003, we were in compliance with our covenants. Approximately $543 was available
and $367 was outstanding under the terms of the Line at June 30, 2003.
In connection with obtaining the Line, we issued a warrant to the Bank to
acquire 43,042 shares of our common stock at an exercise price of $1.39 per
share and which expires in June 2008. The estimated fair value of the warrant
issued was $44 and was recorded as debt issuance costs. We also incurred legal
and professional fees of approximately $38 in obtaining the Line. These amounts,
totaling $82, will be amortized over the one-year term of the Line and included
in interest expense.
At June 30, 2003 there were no letters of credit or other amounts for bank
services outstanding under the Line.
5) Accrued Expenses
Accrued expenses consist of the following:
June 30, December 31,
2003 2002
Legal and professional fees.............. $ 550 $ 1,202
Payroll and related costs................ 1,164 2,778
Severance................................ 595 355
Unutilized leased facilities............. 501 566
Royalties to Israeli government agencies 618 828
Legal settlements........................ 22 277
Sales, excise and other taxes............ 868 689
Other.................................... 898 1,320
--- -----
$5,216 $8,015
====== ======
6) Commitments and 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 and 15 of the Securities
Act of 1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against one or both of us 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. Similar "IPO allocation" actions
have been filed against over 300 other issuers that have had initial public
offerings since 1998 and all are included in a single coordinated proceeding in
the Southern District of New York. Certain of our employees were members of the
putative classes alleged in these actions (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.
A proposal was made in July 2003, for the settlement and release of claims
against the issuer defendants, including us. The settlement is subject to a
number of conditions, including approval of the proposed settling parties and
the court. We believe the terms of the settlement will not have a material
impact on our results of operations, liquidity, and financial condition. If the
settlement does not occur, and litigation against us continues, we believe we
have meritorious defenses and intend to defend the case vigorously. However,
failure to successfully defend this action could substantially harm our results
of operations, liquidity and financial condition.
11
On March 20, 2003, Industria Politecnica Meridionale Spa., or IPM, filed a
complaint against us in the United States District Court for the Northern
District of California. The lawsuit alleges breach of the Ravisent Technologies
Internet Appliance Group, Inc., or RTIAG, agreement with IPM and fraud in
connection with the delivery of circuit boards to IPM that were not in
compliance with the agreement, and claims damages of $15,000 for breach of
contract, and $15,000 for fraud and punitive or exemplary damages. On May 2,
2003 we moved to dismiss all claims. On or about June 23, 2003, IPM filed an
amended complaint adding RTIAG as a party in the action and providing further
specificity on the fraud allegation. We withdrew our motion to dismiss shortly
thereafter. We filed an answer to the amended complaint on July 3, 2003 denying
the breach of contract and fraud claims. RTIAG filed a counterclaim on July 3,
2003 for breach of contract against IPM, seeking damages of $2,733 plus
interest, fees and costs. IPM filed an answer to the amended complaint on July
22, 2003 denying the breach of contract claims. A case management conference has
been scheduled for September 9, 2003. 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 are unable to predict the outcome of these matters or
reasonably estimate an amount of possible loss given the current status of this
matter.
Various third parties have notified us, as well as some of our former customers
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 $6,500 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, in 2002, accrued
$375.
In March 2003 we entered into a confidential settlement agreement with Phoenix
Technologies and the remaining $550 of the purchase price for the sale of the
assets of our former Internet Appliance ("IA") business held in escrow by a
third party for indemnification purposes (included in restricted cash at
December 31, 2002), was paid to us and is no longer restricted. In connection
with this settlement agreement, we reversed accruals of approximately $743
initially recorded in March 2001 as part of the sale of our former IA business.
From time to time we are involved in lawsuits, claims, investigations or
proceedings, in addition to those identified above, consisting of intellectual
property, commercial, employment and other matters, which arise in the ordinary
course of business. In accordance with SFAS No. 5, we make a provision for a
liability when it is both probable that a liability has been incurred, and the
amount of the loss can be reasonably estimated. These provisions are reviewed at
least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular case. It is possible that our cash flows or results
of operations could be affected in any particular period by the resolution of
one or more of these contingencies.
12
7) Segment Information
We sell and license our technology to customers primarily in North America,
Europe and Asia. A significant portion of our revenues are derived from our
North American operations, and our total revenues were derived from the
following geographic regions:
Three Months Ended June 30,
---------------------------
Country/ Geographic Region 2003 2002
- -------------------------- --------------------- ----------------
% of % of
Total Total
----- -----
North America:
United States ............ $ 958 35% $1,201 34%
Canada ................... -- -- 579 16
------ ------ ------ ---
Total - North America 958 35 1,780 50
------ ------ ------ ---
Europe:
Germany .................. 7 -- 292 8
France ................... 708 26 434 12
Netherlands .............. 117 4 176 5
Switzerland .............. -- -- 166 5
United Kingdom ........... 52 2 115 3
Other .................... 206 7 227 7
------ ------ ------ ---
Total - Europe ...... 1,090 39 1,410 40
------ ------ ------ ---
Asia-Pacific:
China .................... 50 2 -- --
Israel ................... 51 2 68 2
Japan .................... 587 21 160 5
Other .................... 24 1 89 2
------ ------ ------ ---
Total - Asia-Pacific 712 26 317 9
------ ------ ------ ---
Other ......................... 14 0 36 1
------ ------ ------ ---
Total ................ $2,774 100% $3,543 100%
====== ===== ====== ===
Six Months Ended June 30,
---------------------------
Country/ Geographic Region 2003 2002
- -------------------------- --------------------- ----------------
% of % of
Total Total
----- -----
North America:
United States ............ $2,175 35% $3,273 40%
Canada ................... 250 4 1,256 15
------ ------ ------ ---
Total - North America 2,425 39 4,529 55
------ ------ ------ ---
Europe:
Germany .................. 23 -- 565 7
France ................... 1,291 21 1,032 13
Netherlands .............. 238 4 439 5
Switzerland .............. 152 2 224 3
United Kingdom ........... 114 2 239 3
Other .................... 483 8 431 5
------ ------ ------ ---
Total - Europe ...... 2,301 37 2,930 36
------ ------ ------ ---
Asia-Pacific:
China .................... 56 1 -- --
Israel ................... 168 3 169 2
Japan .................... 1,127 18 372 5
Other .................... 41 1 122 1
------ ------ ------ ---
Total - Asia-Pacific 1,392 23 663 8
------ ------ ------ ---
Other ......................... 73 1 61 1
------ ------ ------ ---
Total ................ $6,191 100% $8,183 100%
====== === ====== ===
13
8) 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 2003 DRM, is our reportable segment.
The DRM segment was created as a result of the acquisition of eMation in
December 2001. The Axeda DRM System is 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. eMation historically derived its
main source of revenues from its industrial automation products, which are now
also offered as Axeda Agent components of our DRM System. We also continue to
separately sell such industrial automation products, such as the Axeda
Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, to
support our traditional industrial automation business.
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.
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Revenues:
DRM ............................... $2,728 $2,204
Other ............................. 46 1,339
------ ------
Total ..................... $2,774 $3,543
====== ======
Gross profit:
DRM .......................... $1,230 $ 468
Other ........................ 45 535
------ ------
Total ..................... $1,275 $1,003
====== ======
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Revenues:
DRM ................................. $5,759 $4,698
Other ............................... 432 3,485
------ ------
Total ....................... $6,191 $8,183
====== ======
Gross profit:
DRM ............................ $2,830 $1,434
Other .......................... 182 919
------ ------
Total ................... $3,012 $2,353
====== ======
14
9) Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information:
Six Months Ended June 30,
2003 2002
---- ----
Cash paid during the period for:
Interest ............................................................... $ 27 $ 67
Income taxes (refund) .................................................. -- (308)
===== =====
Non-cash investing and financing activities:
Amortization of deferred stock compensation ............................ 299 996
===== =====
Issuance of warrants in connection with bank line of credit ............ 44 --
===== =====
Issuance of stock options in connection with grants below fair value ... 38 50
===== =====
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
===== =====
10) Comprehensive Income (Loss)
The components of comprehensive loss are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss ................................. $(4,853) $(10,475) $(9,640) $(19,587)
Foreign currency translation adjustment .. 42 201 6 125
--- --- --- ---
Comprehensive loss ....................... $(4,811) $(10,274) $(9,634) $(19,462)
======== ========= ======== =========
15
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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; declining sales of our legacy products; our
dependence on the cyclical software industry; present and future competition;
our ability to manage technological change and respond to evolving industry
standards; the long sales cycle for DRM solutions; our customers' ability to
implement or integrate our DRM solutions successfully and in a timely fashion 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 "Factors that may Affect Future Results - 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.
Overview and Recent Events
Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our operating losses
and corresponding use of cash. We have halved the number of global offices,
reduced staffing levels by approximately 46%, and have closely monitored our
infrastructure costs. We exited the PC business and focused our efforts on
several key markets for DRM Systems products. In 2002 and through the second
quarter of 2003, we recorded $1.9 million and $1.0 million in restructuring
charges, respectively, to reduce staffing levels, to terminate certain leases
and consolidate our operations. We will continue to evaluate our cost structure
and may undertake additional measures to reduce expenses in the future.
In May 2002 we entered into a Software Distribution Agreement with Sonic IP,
Inc. ("Sonic"), a wholly-owned subsidiary of Sonic Solutions. As a result, we
exited the personal computer, or PC, business and terminated or assigned to
Sonic substantially all of the customer contracts of our PC business. As a
result, a comparison of our results in 2003 with 2002 may not provide a
meaningful indication of our future performance.
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 entry into the DRM market and changed our strategic
focus to the enterprise software and services market. 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 enterprise component of the Axeda DRM System. For
the six months ending June 30, 2003, substantially all of our license and
services revenues were from sales of our DRM solutions.
16
Results of Operations
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002.
The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in our
consolidated statements of operations:
Axeda Systems Inc.
Unaudited Consolidated Statements of Operations Data
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
2003 2002 2003 2002
--------------------- ---------------------- ----------------------- --------------------
Percent of Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Revenues:
License............................. $ 2,158 77.8% $ 2,578 72.8% $ 4,475 72.3% $ 5,618 68.6%
Services and maintenance ........... 570 20.5 674 19.0 1,533 24.8 1,217 14.9
Hardware.......... ................. 46 1.7 291 8.2 183 2.9 1,348 16.5
-- --- --- --- --- --- ----- ----
Total revenues......... .......... 2,774 100.0 3,543 100.0 6,191 100.0 8,183 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License......... ................... 314 11.3 782 22.1 825 13.3 1,817 22.2
Services and maintenance ........... 1,025 37.0 990 27.9 2,037 32.9 1,707 20.8
Hardware... ........................ 1 - 243 6.9 1 - 1,252 15.3
Software amortization.. ............ 159 5.7 525 14.8 316 5.1 1,054 12.9
Inventory charges.. ................ - - - - - - - -
- - - - - - - -
Total cost of revenues ........... 1,499 54.0 2,540 71.7 3,179 51.3 5,830 71.2
----- ---- ----- ---- ----- ---- ----- ----
Gross profit......... ................. 1,275 46.0 1,003 28.3 3,012 48.7 2,353 28.8
----- ---- ----- ---- ----- ---- ----- ----
Research and development
Non-cash compensation..... ........ 28 1.0 34 1.0 56 0.9 98 1.2
Other research and development
expense.... ...................... 1,407 50.7 2,090 59.0 3,121 50.4 4,322 52.8
Sales and marketing
Non-cash compensation ............. 6 0.2 19 0.5 17 0.3 38 0.5
Other selling and marketing
expense....... ................... 2,276 82.1 4,990 140.8 4,781 77.2 9,792 119.7
General and administrative
Non-cash compensation ............. 170 6.1 239 6.8 273 4.4 1,099 13.4
Other general and administrative
expense. ......................... 1,956 70.5 3,076 86.8 4,514 72.9 6,094 74.5
Provision for doubtful accounts ... - - (67) (1.9) 3 0.1 (22) (0.2)
Depreciation and amortization ......... 262 9.5 330 9.3 570 9.2 640 7.8
Special charges... .................... - - 820 23.1 - - 820 10.0
----- ----- ------ ----- ------ ------ ------ ----
Total Operating Costs ................. 6,105 220.1 11,531 325.4 13,335 215.4 22,881 279.7
----- ----- ------ ----- ------ ------ ------ -----
Operating loss.......... .............. (4,830) (174.1) (10,528) (297.1) (10,323) (166.7) (20,528) (250.9)
(Gain) loss on sales of assets ........ - - 37 1.0 (743) (12.0) 37 0.5
Interest (income) expense, net and
other (income) expense, net .......... (22) (0.8) (90) (2.5) (34) (0.5) (310) (3.8)
---- ----- ---- ----- ---- ----- ----- -----
Loss before income tax (benefit) ...... (4,808) (173.3) (10,475) (295.6) (9,545) (154.2) (20,255) (247.6)
Income tax (benefit) .................. 45 1.6 - - 95 1.5 (668) (8.2)
----- ----- ------ ----- ------ ------ ------ -----
Net loss .............................. $ (4,853) (174.9)% $(10,475) (295.6)% $ (9,640) (155.7)% $ (19,587) (239.4)%
======== ====== ======= ====== ======== ====== ======= ======
17
AXEDA SYSTEMS INC.
Results of Operations
Revenues. Overall revenues decreased by $0.8 million or 22% and $2.0 million or
24%, to $2.8 million and $6.2 million, during the three and six months ending
June 30, 2003, respectively, compared to the same periods in 2002. Sales of our
DRM solutions increased $0.5 million and $1.1 million, while PC and hardware
sales decreased $1.3 million and $3.1 million during the three and six months
ending June 30, 2003, respectively.
License revenues for the three and six months ending June 30, 2003 decreased by
approximately $0.4 million and $1.1 million, respectively, compared to the same
periods in 2002. The decrease in license revenues was mainly attributable to the
discontinuation of our former PC business, which contributed $1.0 million and
$1.9 million to the decrease during the three and six months ending June 30,
2003, respectively. Partially offsetting these decreases were increases in DRM
license revenues of approximately $0.6 million and $0.8 million during the three
and six months ending June 30, 2003, respectively. We do not expect any future
license revenues from our former PC business, and expect DRM System license
revenues to increase as our DRM Systems are more widely adopted.
Hardware revenue for the three and six months ending June 30, 2003 decreased by
approximately $0.2 million, and $1.2 million, respectively, compared to the same
periods in 2002, due to decreased sales of components for our former Internet
appliances and Internet set-top boxes. We expect future hardware revenues and
related gross profit to be minimal.
Services and maintenance revenues decreased $0.1 million and increased $0.3 for
the three and six months ending June 30, 2003, respectively, compared to the
same periods in 2002. The decrease in services revenues for the quarter was
attributable to a reduced number of engagements compared to the same period in
2002. The increase over the six-month period, in comparison to the same period
in 2002 is due to a greater demand during our first quarter of 2003 for
professional services in connection with existing DRM installations as well as
additional maintenance plans sold with our DRM Systems. We anticipate services
and maintenance revenues will vary, as work in this area is subject to our
customers' requirement and approval process.
Historically, the majority of our revenues have been derived from a small number
of customers. However, as our model has shifted to the enterprise software
market, our revenues are becoming less concentrated. For the three and six month
period ending June 30, 2003, our top three customers accounted for $0.8 million
or 30% and $1.2 million or 20% of our total revenues, respectively. For the
three and six month period ending June 30, 2002, our top three customers
accounted for $1.0 million or 29% and $2.1 million or 26% of our total revenues,
respectively. In the future, we expect our revenues to be less concentrated as
sales of our enterprise software and services span a wider customer base. There
has also been a shift in industry-wide buying patterns for enterprise software,
from large up-front purchases to smaller, more frequent purchases over time.
We sell our DRM System solutions primarily to companies in the industrial and
building automation, high technology devices, medical instrumentation, and
office automation industries. In the quarter ending June 30, 2003 customers
based in North America accounted for 35% of our revenues. We anticipate that
revenues from international operations will continue to represent a significant
portion of our revenues.
Cost of Revenues.
Cost of revenues decreased by $1.0 million and $2.7 million, or 41% and 45%,
respectively, to $1.5 million and $3.2 million for the three and six months
ending June 30, 2003 compared to the same periods in 2002.
Cost of revenues for license fees for the three and six months ending June 30,
2003 decreased by approximately $0.5 million and $1.0 million, respectively,
compared to the same periods in 2002, due to a decrease in costs associated with
our former PC products. We expect our cost of license fees as a percentage of
license revenues to decline, as our license revenues are now comprised entirely
of our DRM products.
Cost of revenues for hardware sales for the three and six months ending June 30,
2003 decreased by approximately $0.2 million and $1.3 million, respectively,
compared to the same periods in 2002. The decrease in cost of hardware revenues
corresponds directly to the decrease in our hardware sales for the three and six
months periods.
Cost of revenues for services and maintenance remained flat and increased by
$0.3 million for the three and six months ending June 30, 2003, respectively,
compared to the same periods in 2002.
The $0.3 million increase in cost of services and maintenance for the six months
ending June 30, 2003 is attributable to a $0.3 million increase in sales of our
DRM System services and included $0.1 million of services severance expense in
the three-month results ending June 30, 2003. We expect our cost of services and
maintenance as a percentage of services and maintenance revenues to decline, to
reflect cost savings from our restructuring activities.
18
Software amortization of our developed and core technologies for the three and
six months ending June 30, 2003 decreased by $0.4 and $0.7 million,
respectively, compared to the same periods in 2002, due to an impairment of our
identified intangibles in the fourth quarter of 2002. Non-cash amortization of
acquired technology will represent approximately $0.6 million of our cost of
revenues for the year ending December 31, 2003.
Gross Profit. Gross profit increased $0.3 million and $0.7 million, or 27% and
28%, to $1.3 million and $3.0 million for the three and six months ending June
30, 2003, respectively, compared to the same periods in 2002. The increase in
gross profit is largely attributable to an increase in revenues from our DRM
license fees and the higher gross profit associated with such revenues and
reduced software amortization expense. Offsetting these increases were
corresponding decreases in revenue and gross profit from our former PC products
and DRM services and maintenance.
For the three and six months ending June 30, 2003, 78% and 72% of our total
revenues were derived from license fees in comparison to 73% and 69% during the
same periods in the prior year. As a percentage of total revenues, gross profit
increased from 28% to 46% for the three months ending June 30, 2003 and 29% to
49% for the six months ending June 30, 2003, compared to the same periods in
2002. The increase in gross profit margin was largely due to increased revenues
and associated gross profit from our DRM licenses fees and reduced software
amortization expense.
DRM license gross profit margin was 85% and 86 % for the three and six months
ending June 30, 2003, respectively, and 79% and 83 % for the three and six
months ending June 30, 2002, respectively. Services and maintenance plans gross
profit margin was negative 80% and negative 33% for the three and six months
ending June 30, 2003, respectively, reflecting underutilization of professional
services employees and restructuring charges of $0.1 million. For the three and
six months ending June 30, 2002 services and maintenance plans gross profit
margin was negative 34% and negative 33%, respectively. The variability in our
services and maintenance gross profit margin reflects the variability in our
services revenues, as our service costs are relatively fixed over the short
term.
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, quality assurance
and testing. Research and development expenses decreased $0.7 million and $1.2
million, or 33% and 28%, to $1.4 million and $3.1 million for the three and six
months ending June 30, 2003, respectively, compared to the same periods in 2002.
The $0.7 million decrease in the three months ending June 30, 2003 was
attributable to the discontinuance of the PC development team, which contributed
$0.5 million as well as a decrease in the use of outside consultants and other
costs, which totaled $0.2 million. Included in our results for the three months
ending June 30, 2003 was $0.1 million of severance expense. The $1.2 million
decrease in the six months ending June 30, 2003 was due to the discontinuance of
the PC development team, which contributed $1.3 million and was partially offset
by $0.1 million of one-time transition expenses associated with the closing of
our Israeli operations. As a percentage of revenues, research and development
expenses decreased from 59% to 51%, and 53% to 50% for the three and six months
ending June 30, 2003, compared to the same periods in 2002. We expect research
and development expenses to decrease in the second half of 2003 to reflect cost
savings from our restructuring activities. Additionally, we expect research and
development expenses to decrease as a percentage of revenues as our future
revenues increase.
Sales and Marketing Expense. Other sales and marketing expenses consist of
salaries, travel expenses and costs associated with trade shows, advertising and
other sales and marketing efforts, as well as technical support costs. Sales and
marketing expenses decreased approximately $2.7 million and $5.0 million, or 54%
and 51%, to $2.3 million and $4.8 million for the three and six months ending
June 30, 2003, respectively, compared to the same periods in 2002.
The elimination of our former business development personnel focused on
professional services in 2002 contributed $1.3 million and $2.5 million to the
decrease in sales and marketing expense for the three and six months ending June
30, 2003 compared to the same periods in the prior year. In addition, reduced
public relations, trade shows and advertising collateral expense equally
contributed approximately $0.5 million and $1.0 million for the three and six
month period ending June 30, 2003 over the prior year. Included in our six
months results for the prior year were $0.6 million for the PC sales team and
initial branding expense both of which were not incurred in 2003. Finally,
reductions in sales staff headcount, the closure of our Israeli office, sales
recruitment, and travel expense contributed $0.3, $0.2, $0.1 and $0.1 million,
respectively, to the decrease for the three months ending June 30, 2003,
compared to the same period in the prior year. Also included in our results for
the three months ending June 30, 2003 was $0.1 million of severance expense. As
a percentage of revenues, sales and marketing expenses decreased from 141% to
82%, and 120% to 77%, respectively, for the three and six months ending June 30,
2003, compared to the same periods in 2002. We expect sales and marketing
expenses to decrease in the second half of 2003 to reflect cost savings from our
restructuring activities. Additionally, we expect sales and marketing expenses
to decrease as a percentage of revenue as our future revenues increase.
19
Other General and Administrative Expense. Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
human resources, legal and other management departments. Other general and
administrative expenses decreased $1.1 million and $1.6 million, or 36% and 26%,
to $2.0 million and $4.5 million for the three and six months ending June 30,
2003, respectively, compared to the same periods in 2002. As a percentage of
total revenues, other general and administrative expenses decreased from 87% to
71%, and 74% to 73% of total revenues for the three and six months ending June
30, 2003.
Rent and other expense to support our former PC business contributed $0.1
million and $0.5 million to the decrease in general and administrative expense
for the three and six months ending June 30, 2003 compared to the same periods
in the prior year. In addition reduced third party consultant, staff, and
estimated patent and intellectual property expense contributed $0.3, $0.3, and
$0.4, respectively, to the decrease for the three and six months ending June 30,
2003 compared to the same period in the prior year. Finally, cost reductions
associated with the closure of our Israeli office were offset by an increase in
severance expense for the three and six month period ending June 30,2003,
compared to the same periods in 2002. We expect general and administrative
expense to decrease in the second half of 2003 to reflect cost savings from our
restructuring activities. Additionally, we expect general and administrative
expense to decrease as a percentage of revenue as our future revenues increase.
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 decreased from $1.1 million
for the six months ending June 30, 2002 to $0.3 million for the six months
ending June 31, 2003. The decrease is attributable to modifications to certain
outstanding stock options and deferred stock compensation expense incurred in
2002. No similar expense was incurred during in the first six months of 2003.
For the six months ending June 30, 2002, a $0.4 million expense was incurred for
the acceleration of option vesting in accordance with the termination of certain
employment agreements. In addition, $0.2 million was the result of amortization
of deferred stock compensation recorded in connection with stock options granted
to employees at less than fair market value granted between July and December
2001. The remaining portion of the 2002 non-cash compensation general and
administrative expense was attributable to a one-time charge of $0.2 million for
the modification of stock options held by a former employee.
Depreciation and Amortization. We recorded depreciation and amortization of $0.3
million and $0.6 million for each of the three and six months ending June 30,
2003 and June 30, 2002, respectively.
Special Charges. Special charges for the six months ended June 30, 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
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. No special
charges were recorded for the six months ending June 30, 2003.
Gains on Sales of Assets. We signed a confidential settlement agreement in March
2003 for the escrow relating to the sale of the assets of our former IA business
in March 2001. In connection with this settlement agreement, we reversed
accruals of approximately $0.7 million recorded in March 2001 as part of the
sale. No corresponding gains were recorded for the six months ending June 30,
2002.
Interest (Income) and Expense, net and Other, net. Net interest income decreased
by $0.3 million or 89% for the six months ending June 30, 2003 compared to the
same period in 2002. The decrease is the result of lower average cash balances
and lower bank interest rates in 2003.
Provision for Income Taxes (Benefit). The income tax benefit recorded for the
six months ending June 30, 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.
20
LIQUIDITY AND CAPITAL RESOURCES
Since March 2001, our operations have largely been financed through the sales of
the assets of our Consumer Electronics ("CE") and IA businesses. As of June 30,
2003, we had approximately $7.8 million in cash and cash equivalents.
Net cash used in operating activities for the six months ending June 30, 2003
was $11.4 million, compared to $14.1 million for the six months ending June 30,
2002. Cash used in operating activities for the six months ending June 30, 2003
was primarily the result of our net loss of approximately $9.6 million, and
other changes in working capital of $1.8 million. The reduction in net cash used
in operations is primarily the result of the lower net loss.
Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our operating losses
and corresponding use of cash. We have halved the number of global offices,
reduced staffing levels by approximately 46%, and have closely monitored our
infrastructure costs. We exited the PC business and focused our efforts on
several key markets for DRM Systems products. In 2002 and through the second
quarter of 2003, we recorded $1.9 million and $1.0 million in restructuring
charges, respectively, to reduce staffing levels, to terminate certain leases
and consolidate our operations. We will continue to evaluate our cost structure
and may undertake additional measures to reduce expenses in the future.
Net cash used in investing activities for the six months ending June 30, 2003
was $0.1 million, as compared to $0.8 million for the six months ending June 30,
2002, and consisted of purchases of furniture and equipment in both periods. We
have no material commitments for capital expenditures, and we anticipate minimal
spending on capital expenditures as our needs in operations, infrastructure and
personnel arise.
Net cash provided by financing activities was $0.2 million for the six months
ending June 30, 2003 and consisted of borrowings under a bank line of credit
offset by principal payments reducing other indebtedness. Net cash used in
financing activities of $1.8 million for the six months ending June 30, 2002
consisted of principal payments reducing other indebtedness.
In June 2003, we executed a loan and security agreement with Silicon Valley Bank
that provides us with a line of credit or the Line, in the amount of the lesser
of $2 million or the borrowing base, as defined (limited to a percentage of
eligible accounts receivable). As of June 30, 2003, we had $0.4 million in
borrowings under the Line, which was repaid in July 2003. In addition, we had
approximately $0.1 million outstanding on an equipment loan facility, or the
Loan, with payments due monthly over a 36 month period ending in December 2003.
As of June 30, 2003, we were in compliance with all of our covenants under the
Line and the Loan.
As of June 30, 2003, we have $1.2 million of estimated accrued costs related to
facilities that we no longer occupy. We have made significant efforts to
terminate these occupancy arrangements, but if these arrangements cannot be
terminated, we may be required to make these payments.
We maintain an irrevocable, cash-secured, standby letter of credit, or the
letter of credit, from a bank for $0.15 million as security for our corporate
headquarters lease. The letter of credit expires on August 31, 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 on August 31, 2003. This amount is restricted for
withdrawal and is included in other assets (non-current) in our consolidated
balance sheets.
Based on our cash resources, our expected continued year over year growth in DRM
Systems revenues and the continued realization of savings from our already
implemented expense reductions, we expect to have sufficient cash resources to
meet our cash needs through at least June 30, 2004. However, due to risks and
uncertainties, we cannot assure investors that our future operating cash flows
will be sufficient to meet our requirements. In such event, our operations and
liquidity will be materially adversely affected. We will continue to pursue
attractive financing and investment arrangements, and if the capital markets
present other attractive opportunities, we may seek to raise cash through the
sale of equity or issuance of debt. However, additional financing may not be
available when needed and, if such financing is available, it may not be
available on terms favorable to us.
21
Employee and Director Stock Options
Option Program Description
Our stock option program is a broad-based, long-term retention program
that is intended to attract, retain and provide performance incentives for
talented employees, officers and directors, and to align stockholder and
employee interests. Currently, we grant options from the 1999 Stock Incentive
Plan, as amended (the "1999 Plan"). The 1999 Plan has three separate programs
which include: 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 addition, our stock
option program includes the 1995 Stock Option Plan (the "1995 Plan"), from which
we no longer grant options. In connection with the eMation 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. The plans
listed above are collectively referred to in the following discussion as "the
Plans." We consider our option programs critical to our operation and
productivity; essentially all of our employees participate. Option vesting
periods are generally 1 to 4 years and expire 10 years from the grant date for
the 1999 Plan. Option vesting periods are generally 2 to 5 years and expire 5 to
10 years from the grant date for the 1995 Plan.
All stock option grants to executive officers are made after a review
by and with the approval of the Compensation Committee of the Board of
Directors. All members of the Compensation Committee are independent directors,
as defined in the current and proposed rules applicable to issuers traded on the
NASDAQ Stock Market. See the "Compensation Committee Report in Executive
Compensation" appearing in our 2003 Proxy Statement for further information
concerning our policies and procedures, including those of the Compensation
Committee, regarding the use of stock options.
Distribution and Dilutive Effect of Options
The table below provides information about stock options granted for
the six months ended June 30, 2003 and for the year ended December 31, 2002 to
our Chief Executive Officer and our three other executive officers, as
identified in our 2003 Proxy Statement. This group is referred to as the "Named
Executive Officers". Please refer to the section headed " Stock Option Exercises
and Option Holdings " below for the Named Executive Officers.
Options granted to Named Executive Officers for the six months ended
June 30, 2003 and the year ended December 31, 2002 are summarized as follows:
Year Ended
Six Months Ended December 31,
June 30, 2003 2002
------------- ----
Net grants during the period as % of outstanding shares (#) 1.25% 9.17%
Grants to Named Executive Officers during the period as %
of total options granted (%) .............................. 29.46% 13.82%
Grants to Named Executive Officers during the period as %
of outstanding shares granted (%) ......................... 0.37% 1.27%
Cumulative options held by Named Executive Officers as % of
total options outstanding (%) ............................. 41.87% 40.90%
22
General Option Information
The following table sets forth the summary of activity under the Plans
for the six months ended June 30, 2003 and the year ended December 31, 2002:
Options Outstanding
---------------------------------------
Number of Shares Number of Shares Weighted Average
Available for Issuable on Exercise Exercise Price
Options of Options (per share)
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
======= =========
Grants ....................................... (339,500) 339,500 $0.59
Exercises .................................. -- (65,000) $0.01
Cancellations* ............................... 370,262 (438,650) 3.19
Additional shares reserved ................... 1,100,000 N/A
--------- ---
June 30, 2003 ................................ 1,394,186 4,914,669 $1.77
========= =========
* The "Number of Shares Available for Options" does not include options under
assumed plans exercisable for 103,319 and 68,388 shares that were cancelled
during 2002 and the first six months of 2003, respectively, as no options will
be granted in the future pursuant to these assumed plans.
The following table sets forth a comparison, as of June 30, 2003, of the number
of shares subject to our options whose exercise prices were at or below the
closing price of our common stock on June 30, 2003 ("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
--------------------------- ---------------------------- ----------------------------
Number of Weighted Average Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
In-the-money ............... 869,636 $ 0.03 1,543,922 $ 0.49 2,413,558 $ 0.32
Out-of-the-money (1) ....... 1,633,609 $ 3.56 867,502 $ 2.40 2,501,111 $3.16
Total options outstanding .. 2,503,245 $ 2.33 2,411,424 $ 0.85 4,914,669 $ 1.77
(1) Out-of-the-money options are those options with an exercise price equal
to or above the closing price of $1.42 as of June 30, 2003, as reported by the
NASDAQ National Market.
Executive Options
The following table sets forth information regarding stock options granted
in six months ended June 30, 2003, to our Named Executive Officers, each
under our 1999 Plan. Options were granted with an exercise price equal to
or less than 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.
23
Individual Grants
Number of Potential Realizable Value
Securities Percentage of Total Exercise at Assumed Annual Rates of
Underlying Option Options Granted to Price (Per Expiration Stock Price Appreciation for
Name Per Grant Employees * Share) Date Option Terms
- ---- --------- ----------- ------ ---- -----------------------------
5% 10%
-- ---
Robert M. Russell, Jr. ... 0 0 N/A N/A N/A N/A
Dale E. Calder ........... 0 0 N/A N/A N/A N/A
Thomas J. Fogarty ........ 100,000 29.46% $ 0.01 4/28/2013 $66,703 $111,272
Ned E. Barlas ............ 0 0 N/A N/A N/A N/A
*Based on a total of 339,500 shares subject to options granted to employees
under our option plans during the six months ended June 30, 2003.
Stock Option Exercises and Option Holdings
The following table shows stock options exercised by the Named Executive
Officers for the six months ended June 30, 2003, 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 June 30,
2003, 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 the closing
price as of June 30, 2003 of our common stock.
Number of Securities Underlying Values of Unexercised
Number of Shares Unexercised Options In-the-Money Options*
Named Executive Acquired on Value ---------------------------------- ---------------------------
Officer Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------- -------- -------- ----------- ------------- ----------- -------------
Robert M. Russell ....... - $ - 366,665 514,335 $242,583 $ 369,437
Dale E. Calder .......... - - 406,250 168,750 346,125 186,375
Thomas J. Fogarty ....... - - 255,414 174,586 248,499 177,501
Ned E. Barlas ........... - - 171,833 - 131,350 -
* Option values based on stock price of $1.42 on June 30, 2003.
24
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 Plans as of June 30, 2003:
(1) (2) (3)
Number of Securities
Number of Securities Weighted-Average Remaining Available for
to be Issued upon Exercise Price of Future Issuance Under Equity
Exercise of Outstanding Options, Compensation Plans (Excluding
Outstanding Options, Warrants, and Rights Securities Reflected in
Plan Category Warrants, and Rights (per share) Column (1) )
- ------------- -------------------- ----------- ------------
Equity Compensation Plan Approved by
Shareholders (A) (B) .................. 3,363,917 $1.93 1,394,186
========= ===== =========
(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.
(B) The number of shares reserved for issuance under our 1999 Stock Incentive
Plan is automatically increased on January 1 of each year by an amount
equal to three percent (3%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no
event shall such annual increase exceed one million (1,000,000) shares. On
January 1, 2003, 600,000 additional shares were reserved for issuance. At
our 2003 annual stockholders meeting, proposals were approved increasing
the limit of six hundred thousand (600,000) shares on the amount by which
the share reserve under the plan automatically increases at the beginning
of each year will to one million (1,000,000) shares, and increasing the
number of shares authorized for issuance over the term of the Plan (prior
to any automatic increase) by an additional 500,000 shares.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in note 1j to
the consolidated financial statements included at Part I, Item 1 herein.
25
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 $9.6 million for the six
months ended June 30, 2003. 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 and/or
reduce expenses 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 sales of Axeda DRM Systems 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, 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. Our capital requirements
will depend on many factors, including but not limited to the following:
o acceptance of and demand for our DRM products;
o our ability to continue year over year growth in DRM Systems revenues;
o the costs of developing new products;
o the extent to which we invest in new technology and research and
development projects;
o competing technological and market developments; and
o the expansion of strategic alliances for the sales, marketing,
manufacturing and distribution of our products.
To the extent that the currently available funds and revenues are insufficient
to meet current or planned operating requirements, we will be required to seek
additional funds through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources. There can be no
assurance that the financial sources described above will be available when
needed or at terms commercially acceptable to us. If adequate funds are not
available, we may be required to delay, further scale back or eliminate certain
aspects of our operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, products or potential markets. If adequate funds
are not available, our business, financial condition and results of operations
will be materially and adversely affected. If we issue additional stock to raise
capital, your percentage ownership in Axeda would be reduced.
26
Failure to comply with NASDAQ's listing standards could result in our delisting
by NASDAQ from the NASDAQ National Market and severely limit the ability to sell
any of our common stock.
Our common stock is currently traded on the NASDAQ National Market. There can be
no assurance that our common stock will remain eligible for trading on the
NASDAQ National Market. 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 and political 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. The September
11, 2001 terrorist attacks, consequences of the war in Iraq, and the possibility
of war or hostilities relating to other countries, and changes in international
political conditions as a result of these events may continue to affect the U.S.
and the global economy and 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 Systems 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
27
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 but not limited to 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 September 11, 2001 terrorist attacks, the war in Iraq
and the threat of future outbreak or continued escalation of
hostilities involving the United States or other countries; 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 may 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. There has also been a shift in industry-wide buying
patterns for enterprise software, from large up-front purchases to smaller, more
frequent purchases over time. 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
products, 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.
28
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.
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.
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 thirteen 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.
29
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 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.
30
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 former 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
former 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 $6.5
million 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 $2.0 million at June 30, 2003, which
is being amortized over the vesting period of the related stock options, ranging
from one to four years. A balance of $0.3 million remains at June 30, 2003 and
will be amortized as follows: $0.2 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, the
Netherlands, Japan, the United Kingdom, Israel and other countries in Asia and
Latin America. Our operations outside the United States include facilities
located in France and Japan. For the six months ended June 30, 2003, we derived
approximately 65% 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.
31
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.
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 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 have
paid royalties to the OCS in the aggregate amount of $1.4 million. As of June
30, 2003, $0.3 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 $0.6 million
have been repaid. As of June 30, 2003, $0.3 million of the remaining potential
$0.6 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 influence over our future direction
As of June 30, 2003, our executive officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 4.1 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.
32
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.
ITEM 3:
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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation of our disclosure controls and procedures as required
by Rules 13a-15(b) and 15d-15(b), our Chief Executive Officer and Chief
Financial Officer have concluded that as of June 30, 2003 our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934) are effective.
33
PART II: OTHER INFORMATION
Item 1: 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 and 15 of the Securities
Act of 1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against one or both of us 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. Similar "IPO allocation" actions
have been filed against over 300 other issuers that have had initial public
offerings since 1998 and all are included in a single coordinated proceeding in
the Southern District of New York. Certain of our employees were members of the
putative classes alleged in these actions (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.
A proposal has been made for the settlement and release of claims against the
issuer defendants, including us. The settlement is subject to a number of
conditions, including approval of the proposed settling parties and the court.
We believe the terms of the settlement will not have a material impact on our
results of operations, liquidity, and financial condition. If the settlement
does not occur, and litigation against us continues, we believe we have
meritorious defenses and intend to defend the case vigorously. However, failure
to successfully defend this action could substantially harm our results of
operations, liquidity and financial condition.
34
On March 20, 2003, Industria Politecnica Meridionale Spa. ("IPM"), an Italian
corporation, filed a complaint against us in the United States District Court
for the Northern District of California. The lawsuit alleges breach of an
agreement between IPM and our wholly owned subsidiary Ravisent Technologies
Internet Appliance Group, Inc. ("RTIAG") and fraud in connection with the
delivery of circuit boards to IPM that were not in compliance with the
agreement, and claims damages of $15 million for breach of contract, and $15
million for fraud and punitive or exemplary damages. On May 2, 2003, we moved to
dismiss all claims against it. On or about June 23, 2003, IPM filed an amended
complaint adding RTIAG as a party in the action and providing further
specificity on the fraud allegation. The Company withdrew its motion to dismiss
shortly thereafter. Axeda and RTIAG filed an answer to the amended complaint on
July 3, 2003 denying the breach of contract and fraud claims. RTIAG filed a
counterclaim on July 3, 2003 for breach of contract against IPM, seeking damages
of $2.7 million, plus interest, fees and costs. IPM filed an answer to
the amended complaint on July 22, 2003 denying the breach of contract claims. A
case management conference has been scheduled for September 9, 2003. 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.
From time to time, we have received notices of claims of infringement of other
parties' proprietary rights and other claims in the ordinary course of our
business. See "Factors that may Affect Future Results - Risk Factors - 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." 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.
Item 2: CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On June 25, 2003, we issued a warrant to purchase 43,042 shares of our
common stock to Silicon Valley Bank, with an exercise price of $1.39
and expiring in June 2008, in connection with entering into a loan and
security agreement with Silicon Valley Bank. The warrant was issued in
a private placement exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) of the Act.
Item 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
35
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2003 Annual meeting was held on June 17, 2003. The stockholders adopted the
following proposals that were submitted to a vote at such meeting: (1) to elect
two directors to serve for a three-year term ending in the year 2006 and until
their successors are duly elected and qualified, or until their earlier
resignation or removal; (2) to approve an amendment to our 1999 Stock Incentive
Plan to increase the number of shares authorized for issuance over the term of
the plan (prior to any future automatic increase) by an additional 500,000
shares; (3) to approve an amendment to our 1999 Stock Incentive Plan to increase
the limit on the amount by which the share reserve under the plan automatically
increases at the beginning of each year from six hundred thousand (600,000)
shares to one million (1,000,000) shares; and (4) to ratify the appointment of
KPMG LLP as our independent auditors for the year ending December 31, 2003. The
results of the votes on these matters are disclosed below.
Votes Withheld or
Votes For Against or Withheld Abstain
(1) Elect Directors
Walter L. Threadgill 23,008,852 772,787 -
Dale E. Calder 22,869,027 912,612 -
(2) Amend 1999 Stock Incentive Plan to increase the number of
shares authorized by an additional 500,000 shares 9,255,673 2,247,094 250,278
(3) Amend 1999 Stock Incentive Plan to increase the limit on
the amount by which the share reserve under the plan
automatically increases at the beginning of each year 9,248,813 2,256,104 248,128
(4) Ratify appointment of KPMG LLP 23,546,404 216,583 18,652
The following are the names of each of our other directors whose term of office
continued after the annual meeting:
Directors Holding Office Until 2005: Paul A. Vais and James R. McDonald
Directors Holding Office Until 2004:Robert M. Russell Jr. and Bruce J. Ryan
Item 5: OTHER INFORMATION
None.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index (following the Signatures section of
this report) are included, or incorporated by reference, in this quarterly
report.
(b) The following reports were filed on Form 8-K during this period:
On April 29, 2003 the Registrant filed a Form 8-K to furnish information
pursuant to Regulation FD, including its April 29, 2003 press release announcing
financial results for the quarter ended March 31, 2003.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities 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 14th day of August 2003.
August 14, 2003
Axeda Systems Inc.
/s/ Thomas J. Fogarty
-----------------
Thomas J. Fogarty
Executive Vice President and Chief Financial Officer
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately
precedes the exhibits. The following exhibits are included, or incorporated by
reference, in this Quarterly Report on Form 10-Q (and are numbered in accordance
with Item 601 of Regulation S-K):
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. (3)
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. (4)
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. (5)
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. (2)
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. (6)
4.1 Form of registrant's Specimen Common Stock Certificate. (1)
10.1 * Loan and Security Agreement, dated June 25, 2003 by and between Axeda Systems Operating Company, Inc. and
Silicon Valley Bank
31.1 * Certification of the Chief Executive Officer of Axeda Systems Inc. required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 * Certification of the Chief Financial Officer of Axeda Systems Inc. required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 * Certification of the Chief Executive Officer and Chief Financial Officer of Axeda Systems Inc. required
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
FOOTNOTES:
(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 current report on Form 8-K dated February 25, 2002 as filed
with the Securities and Exchange Commission on February 27, 2002.
(3) 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.
(4) 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.
(5) 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.
(6) Incorporated by reference to the registrant's quarterly report on Form 10-Q for the quarterly period ended
March 31, 2002.
* Filed herewith.
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